<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                             REPORT ON FORM 10-KSB

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999


                          COMMISSION FILE NO. 001-12637

                            VIRTUAL COMMUNITIES, INC.
                 ----------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



<TABLE>
<CAPTION>
<S>                                                                          <C>
                       DELAWARE                                              95-4491750
                       --------                                              ----------
 (STATE OF OR OTHER JURISDICTION OF INCORPORATION OR             (IRS EMPLOYER IDENTIFICATION NO.)
                    ORGANIZATION)

          589 EIGHTH AVENUE, SEVENTH FLOOR,
                  NEW YORK, NEW YORK                                           10018
                  ------------------                                           -----
       (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                              (ZIP CODE)

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       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 931-8600

       SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.

          SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (TITLE OF CLASS)

                CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT
                                (TITLE OF CLASS)

                CLASS B REDEEMABLE COMMON STOCK PUCHASE WARRANT
                                (TITLE OF CLASS)


                 UNITS CONSISTING OF ONE SHARE OF COMMON STOCK,
                  ONE CLASS A WARRANT AND ONE CLASS B WARRANT
                                (TITLE OF CLASS)

  Each class of the Registrant's securities set forth above trades on the Nasdaq
  SmallCap Market.

    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
<PAGE>

Registrant was required to file such  reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

    Issuer's revenues for its most recent fiscal year were $857,000.

    The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the closing price of such Stock as
of April 10, 2000, was approximately $52,850,690.

    The number of shares outstanding of the issuer's common stock, as of
April 10, 2000 was 16,500,244.

    Documents Incorporated by Reference: None, except for those indicated in
the Exhibit Index.

                                       2
<PAGE>

                           VIRTUAL COMMUNITIES, INC.

                      1999 ANNUAL REPORT ON FORM 10-KSB

                               TABLE OF CONTENTS


PART I

Item 1.
Business.......................................................          5

Item 2.
Properties.....................................................         18

Item 3.
Legal Proceedings..............................................         18

Item 4.
Submission of Matters to a Vote of Security Holders............         19

PART II

Item 5.
Market for Registrant's Common Equity and
Related Stockholder Matters....................................         21

Item 6.
Selected Financial Data........................................         23

Item 7.
Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................          24

Item 8.
Financial Statements and Supplementary Data....................         42

Item 9.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures...........................         42

PART III

Item 10.
Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..............         43

Item 11.
Executive Compensation.........................................         46

Item 12.
Security Ownership of Certain Beneficial Owners and
Management.....................................................         52


                                       3
<PAGE>

Item 13.

Certain Relationships and Related Transactions.................         54

PART IV

Item 14.
Exhibits, Financial Statements and Reports on
Form 8-K.......................................................         57


SIGNATURES.....................................................

                                       4
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ITEM 1.   BUSINESS

SUMMARY

     Virtual Communities, Inc. (the "Company") is a developer and publisher of
online business-to-business and business-to-consumer communities. Through its
proprietary Community Management Solution(TM) (CMS), the Company designs and
develops web-based vertical communities containing a comprehensive suite of
products and services that includes web publishing and content management
software, integrated e-commerce solutions and best-of-breed interactive
community features. The Company also offers its CMS clients with editorial and
marketing services and an advertising sales network. The Company believes CMS
offers a rapid, 90-day, one-stop solution for creating an online community that
contains all the web tools required for managing content, conducting e-commerce
and attracting and retaining online visitors.

     The central component of CMS is Cortext(TM) Web Publishing and Content
Management Software ("Cortext"). Cortext is "object-oriented" software
application that allows various components of a web site, including articles,
images, sounds and other web resources, to be easily manipulated through a
database containing such components. In February 2000, the Company acquired a
majority stake in Cortext, Ltd., an Israeli software developer that developed
the Cortext Software. Cortext, which is based on XML standards, provides a rich
environment for users to create and publish information to the Internet.

     CMS also includes an array of software and programming modules that are
used to create dynamic online communities. These modules include online shopping
malls, industry exchanges, auctions, multimedia content, personal email, chat,
classifieds, message boards and forums, instant messaging, polls, quizzes and
sweepstakes. CMS eliminates the need for Web site publishers to enter into
separate relationships with multiple vendors for software licenses and services
required to create and maintain vertical communities. The Company provides
several of its CMS features through license arrangements with third party
service providers including, but not limited to Intershop Communications, Inc.,
Accuweather, Inc., homestead.com Incorporated, iMediation, Inc, Netgravity,
Inc., OpenSite Technologies, Inc., Talk City, Inc. and Tribal Voice, Inc. We
also develop our own programming tools and visitor retention elements through a
subsidiary of the Company located in Israel and which is engaged in software
development and programming and design services on behalf of the Company.

     We market and sell CMS directly in the U.S., and in the European Community
through Vanco Limited, a U.K. based technology company with whom we entered into
an agreement in February 2000, pursuant to which Vanco provides us with CMS
marketing and technical services. We intend to develop similar relationships
with third parties in other geographic regions in order to extend our marketing
and CMS deployment activities in those regions. The Company has entered into
definitive agreements for the sale of four CMS systems since commencing CMS
sales in August 1999 and is currently negotiating the sale of several additional
CMS installations. We currently take a portion of our fee in the equity of a
client who secures our CMS services. We also provide hosting and maintenance for
our CMS customers, which commence following the completion of our design and
development services on their behalf. Approximately 19% of our revenues derived
from CMS sales for the year ended December 31, 1999.

In addition to our CMS business, we publish five online communities owned by us
and targeted to members of U.S. demographic groups with interests in their
historical ethnic backgrounds. These online communities include: Virtual
Jerusalem (www.virtualjerusalem.com), a leading Internet site containing Jewish
and Israel related content that has been in operation since 1996, Virtual
HolyLand (www.virtualholyland.com), targeted to the Evangelical Christian
community and launched in late 1998, and Virtual Ireland
(www.virtualireland.com), Virtual Italy (www.virtualitaly.com) and Virtual India
(www.virtualindia.com), which were developed and launched during 1999. The
Company's advertisers on its web sites include Continental Airlines, AerLingus
Airlines, Alitalia Airlines, Bailey's Irish Cream, Carmel Wines, The Royal Wine
Company and the Christian Broadcast Network. We are currently adding shopping
malls and store-building capabilities to our own online communities.

The Company, a Delaware corporation formerly known as Heuristic Development
Group, Inc. ("HDG"), consummated a merger (the "Merger") with Virtual
Communities, Inc. ("VCI"), also a Delaware corporation, in October 1999. Prior
to the Merger, we were a development stage company organized to develop, design
and market fitness-related products. In 1999, we decided to pursue a strategy of
acquisition of an existing company culminating in the merger with VCI. VCI was
organized in 1996 to develop and operate online communities on the Web targeted
to specific ethnic groups. After the Merger, we changed our name to Virtual
Communities, Inc., to reflect that our Company's business is now the development
and operation of online communities and related services for third parties and
the publishing of our own online communities.

BACKGROUND

     Prior to the merger, we were a development stage company originally
organized to research, develop, design and market fitness-related products. Our
primary product was the IntelliFit System, a proprietary computerized system
that generates personalized exercise prescriptions and tracks and records
fitness programs. Due to disappointing acceptance of the IntelliFit System, our
management decided to pursue a strategy of investment in or acquisition of an
existing company, culminating in the merger with VCI. Now that VCI has merged
with our wholly-owned subsidiary, our business is that of VCI. In March 2000, we
merged this wholly owned subsidiary into the parent company.

     Accordingly, when we discuss "our" business activities for time periods
prior to the merger in this and other sections of this 10-K, we are referring to

                                       5
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the business of VCI prior to the merger unless we expressly state otherwise.

     VCI was incorporated in August 1996 as Virtual Jerusalem Ltd., Inc. It was
founded to develop, acquire and operate online communities on the Web targeted
to members of demographic groups with interests in their historical ethnic
backgrounds and who want to share information with other members with like
interests. In June 1997, VCI acquired substantially all of the assets and
outstanding shares of Virtual Communities Israel Ltd., formerly called Virtual
Jerusalem Ltd. ("VCIL").  Virtual Jerusalem Ltd., was an Israeli corporation
formed in 1996 by the founders of VCI that developed and published an Internet
Web site called Virtual Jerusalem. VCIL currently develops and maintains the
Company's online communities and performs certain programming, design, software
development and web maintenance services on behalf of the Company pursuant to a
Cost Plus Agreement and certain general and administrative duties on behalf of
the Company pursuant to a Financial Services Agreement between the entities.

     As a result of our experience in developing and publishing five online
communities from 1996 through 1999 and creating over one hundred Web sites for
content partners, we began offering our Community Management Solution ("CMS")
design and development services and software to unrelated third party Web site
publishers in July 1999. Although we historically provided Web site design
development and hosting and maintenance services to our content partners in
exchange, in most cases, for access to content for our online communities,
offering CMS customized software and services to third parties for a fee
represents a relatively new business for us.

     CMS offers customers a single source technology and service solution,
including scalable content management and publishing software, cutting-edge e-
commerce  functionality, best-of-breed community retention features such as
chat, free-email, polls, quizzes, and forums, plus community design and
development services, ongoing maintenance, hosting and 24/7 support. CMS
includes Cortext web publishing and content management software and numerous
interactive elements, some of which we have developed through our VCIL
subsidiary and some of which are licensed from third parties as described in
more detail below. Since mid 1999, we have been increasingly focused on adding
software tools and services to CMS to make it a complete solution required by
Web publishers - be they businesses or other organizations - to manage the
information, advertisements and other interactive elements that make up the
content of their Web sites. We have entered into four CMS agreements with third
parties to date for the provision of these services, and are currently
negotiating with several other parties to provide these services on a fee basis
and have received interest from other entities for CMS. (See "Community
Management Solution".)

     In addition to marketing CMS and engaging in design, development and
maintenance activities for our CMS clients, we currently operate five online
communities: Virtual Jerusalem (www.virtualjerusalem.com), Virtual HolyLand
(www.virtualholyland.com), Virtual Ireland (www.virtualireland.com), Virtual
Italy (www.virtualitaly.com). and Virtual India (www.virtualindia.com). Rather
than create our own content, our Web sites aggregate comprehensive news and a
variety of interactive and community-building elements selected from existing
online entities (called "content partners") with which we enter into
relationships. We wrap the content we obtain from these content partners with
additional features and services to create a cohesive Web environment targeted
to a specific demographic profile. In consideration for the use of such content,
we provide our content partners with a variety of benefits, including links to
their Web sites, a portion of advertising revenues and interactive services.

INDUSTRY BACKGROUND

Growth of the Internet

     The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business electronically.
International Data Corporation ("IDC") estimates that the number of Web users
will grow from approximately 142 million worldwide in 1998 to approximately 502
million worldwide by the end of 2002. This growth is expected to be driven by
the large and growing number of personal computers ("PCs") installed in homes
and offices, the decreasing cost of PCs, easier, faster and cheaper access to
the Internet, improvements in network infrastructure, the proliferation of
Internet content and the increasing familiarity with and acceptance of the
Internet by businesses and consumers. The Internet possesses a number of unique
characteristics that differentiate it from traditional media: lack of geographic
or temporal limitations; real-time access to dynamic and interactive content;
and instantaneous communication with a single individual or with groups of
individuals. As a result of these characteristics, Web usage is expected to
continue to grow rapidly. The proliferation of users, combined with the Web's
reach and lower cost of marketing, has created a powerful channel for conducting
commerce, marketing and advertising.

     IDC also estimates that revenue generated from Internet commerce will
exceed $1.3 trillion by 2003. As the Internet has become more accessible,
functional and widely used, it has emerged as a primary business channel.
Businesses are increasingly using the Web both for marketing and distribution of
their services and products and to communicate and conduct business with their
customers and others.

     IDC estimates that the number of web pages will grow from 925 million in
1998 to 13.1 billion in 2003. This dramatic growth in content has created a
strong need for solutions to content management problems that will allow for the
rapid and effective delivery of information. These solutions must accommodate
the volume, complexity and variability of web content. In addition, these
solutions must be scalable and allow for use by large numbers of content
contributors. In order to address these needs, companies are increasingly
demanding software systems that automate the workflow of content creation,
management and delivery.

                                       6
<PAGE>

     In addition, in an effort to create a more engaging online presence,
companies are seeking to deliver dynamic content and interactive services that
will ensure that visitors will become loyal to their sites, spend time on them
while interacting with other like-minded visitors and engage in e-commerce
activities.

The growth of online communities and free Internet services

     Traditional use of the Web has consisted largely of one-way communications
in which users self select and view different Web sites containing
professionally created content on topics of general interest such as news,
sports and weather. However, there is a growing demand for online community
sites where users can publish content and engage in community activities
including home page building, and interactive discussion or "chat" and forums.
In addition, many users are interested in gaining access to other free services
for entertainment, such as interactive games or video, or for their utility to
the end user, such as e-mail, auction services or purchases through an online
store. Online communities provide a medium for such access and interaction.
These communities generate significant volumes of traffic, as visitors tend to
return to those sites where they have established an online presence or have
become familiar with the services. According to statistics published by Media
Metrix, online community sites have recently been one of the fastest growing
sectors of the Web.

E-commerce and advertising

     The growing acceptance of the Web represents a significant opportunity for
businesses to conduct electronic commerce ("e-commerce") over the Internet. The
Internet allows companies to develop one-to-one relationships with customers
worldwide without making significant investments in traditional infrastructure
such as retail outlets, distribution networks and sales personnel. The Internet
is an increasingly significant global medium for e-commerce. According to IDC,
transactions on the Internet are expected to increase from approximately $32
billion in 1998 to approximately $426 billion in 2002, with the number of users
that are buyers of products and services rising from 26% to 40% in the same
period.

     Increases in consumer purchases on the Internet are expected to be a
significant factor in the growth of e-commerce. Online shopping is a shopping
experience that offers convenience to the shopper. An online consumer's ability
to quickly comparison shop is greatly enhanced by the ability to quickly access
multiple retailers via the Internet. Products commonly sold on the Internet
include items such as software, books, music CDs, videocassettes, and airline
tickets. More recently, businesses have begun selling specialty retail products,
service items and large ticket household consumer goods, as Internet usage and
familiarity has increased.

     According to Forrester Research, total online retail sales in the U.S. are
expected to increase from $7.8 billion in 1998 to $76.3 billion in 2002,
representing a compound annual growth rate of 76.9%. Forrester Research also
projects that the number of U.S. households that shop online will increase from
8.7 million in 1998 to 30.3 million in 2002.

     Growth in the Web has also created an important new advertising channel.
Tools not available in traditional advertising media, such as real-time
measurement of "click-throughs" on advertising banners, further increase the
attractiveness of Web advertising by giving advertisers instant feedback on
campaigns. Jupiter Communications projects that the dollar value of advertising
on the Web is expected to increase from approximately $3.0 billion in 1999 to
approximately $7.7 billion in 2002. To date, businesses and advertisers have
typically used traditional navigational sites and professionally created content
sites for the sale and marketing of their products and services online.

     Online community sites, however, provide more detailed demographic data and
self-selected groups of consumers with an affinity for particular products.
Advertisers can thus more easily deliver targeted messages in a cost-effective
manner on online community sites.

OUR STRATEGY

CMS Business

     In August 1999, our Company decided to re-focus its business model and
leverage its experience in building targeted, vertical online communities. The
Company began marketing its Community Management Solution (CMS), a comprehensive
software and services solution for developing and maintaining web-based
communities. A significant component of this solution, which allows us to offer
our comprehensive community building solution is our acquisition of Cortext
Ltd., an Israeli based company that develops proprietary content management
software technology. Cortext software functions as the platform of CMS.
Cortext's cutting edge technology allows publishers to easily update their
online communities without the need for programmers. The software's object-
oriented architecture, together with its powerful intuitive scripting language,
meets the dynamic requirements of the challenging environment of an online
community. Using Cortext software as our platform for CMS, we are able to
deliver a complete solution for building online communities in less than 90
days.

     Our management believes that as competition for Internet viewers increases,
Web publishers will need to add increasing amounts of content, services and
interactive elements to their vertical communities to attract and maintain
viewers. Increased competition will also require them to offer a wider array of
services that enable their  users to interact with other users, through chat
rooms, message boards, games, free e-mail services and personal home pages. Our
management believes that managing these communities will likely require
sophisticated software and Web maintenance technologies, including content
management systems, Web site registration elements, statistical reporting

                                       7
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services and advertising management and placement software.

     Based on our projection of the increased complexity of Web publishers'
sites, we believe that a growing number of such publishers will prefer a "one
stop" solution for their online needs that offers a comprehensive package of
enabling and enhancing tools, including development and maintenance options,
content management software and a flexible choice of interactive elements that
will serve as retention elements for their visitors. We believe that companies
offering such services will provide Web publishers with the ability to avoid the
relatively high cost associated with entering into numerous individual license
and service agreements with multiple parties to obtain such services.

Online Communities Business

     Our strategy for our five online communities groups that we currently own
and publish, and which are targeted to affinity groups, is to further develop
them by enhancing them with Cortext web publishing and content management
software and providing them with additional "Best of the Web" content,
interactive elements and e-commerce capabilities. In so doing, we expect that we
can further increase the value of these online communities, add additional
visitors and registered users of them and increase revenues derived from each of
them through advertising banner and sponsorship sales and commissions resulting
from e-commerce transactions.

     We have selected our target groups around which to create communities based
on their overall size, Internet use and socioeconomic level. These elements help
ensure that the group will be attractive to potential online advertisers and e-
commerce vendors as well as future partners or acquirers of the same. Our
management thinks that there is a substantial opportunity to generate revenue
from e-commerce and advertising that is focused on target groups with these
characteristics which will make these Web properties attractive to potential
purchasers of the same.

     Our goal is to further develop these communities into fully mature niche
web properties that we will then be able to sell to third parties interested in
acquiring an online community targeted to a specific segment of the population
with whom they currently have a relationship. Such parties may be interested in
acquiring one of our communities for strategic reasons in the event they
currently publish another site targeted to such community and wish to increase
their market share of the same. An Internet service provider or online business
that wishes to obtain a content-rich portal for its current users may also be
interested in acquiring one of our online communities. An entity that may be
interested in one of our online communities could be one that wishes to create a
substantial e-commerce business tailored to one of our target population groups
and wishes to consolidate a Web entity that possesses large numbers of members
of that community with its own Web site.

     The Company may also decide to enter into strategic relationships with
third parties interested in acquiring a percentage ownership in a holding
company that operates one of our communities. In any sale or relationship that
the Company enters into regarding its published communities, the Company intends
to have the same enter into an agreement with the Company for the purpose of
providing the same with our CMS and editorial services.

Our Revenue Sources

     While advertising and hosting have contributed approximately 70% of our
1999 revenues we anticipate that the majority of our revenues in 2000 will
be derived from our CMS design and development services. We project that our Web
site design and development services revenues will become the principal revenue
source for the Company.  In addition, we project that our advertising revenues
will also grow signficantly.

     Below is a more detailed description of our three projected revenue
streams.


     CMS Business

     We offer CMS design and development services and software to third party
Web publishers on a fee basis. We currently charge for CMS on a basis that
provides for half of payment to be in the form of equity in the client's
business. We offer CMS services on a flexible or customized "modular" basis,
allowing Web site publishers to select individual modules for their specific
needs in addition to the basic Cortext web publishing and content management
software. CMS customers may also obtain additional services and components from
the Company such as editorial and marketing services and licenses for software
specifically required for their particular businesses or needs. To provide the
standard suite of modules to CMS customers, we arrange third party licenses for
them or grant sublicenses for software that we previously licensed from Internet
service providers. In order to deliver design and development services and
software programs to our CMS clients, one of our subsidiaries, Virtual
Communities Israel, Ltd., maintains a staff of Internet designers, programmers
and software developers who create, update and maintain CMS for our clients.

     To date we have entered into four CMS agreements with third parties,
including one through our relationship with Vanco Limited (see "Our Marketing
Efforts - CMS Business" below). At the same time we enter into a design and
development agreement with our CMS clients, we also enter into a second
agreement with them for the provision of hosting and maintenance services
following the completion of CMS development for them. Pursuant to our CMS
agreement, we grant a limited, non-exclusive, worldwide, perpetual royalty-free,

                                       8
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nontransferable license to use CMS and its various modules which is installed on
a client's existing site or on a new site designed by the Company. We also
provide licenses for a variety of programming elements designed by us and
interactive elements provided by third parties. We provide for the completion of
CMS within a 90 day period and the term of our maintenance agreements are for
one year automatically renewed for additional one-year terms unless either party
elects to terminate the same.

     Advertising

     Our management thinks that our Web communities have an advertising
advantage over general Web sites in that their target audiences are clearly
defined, well educated and have excess disposable income. These characteristics
are the type of demographic profile that advertisers traditionally seek. We
currently have agreements with a number of advertisers, including: Continental
Airlines, Aer Lingus, Alitalia, Vitamin Shoppe Industries and Econophone.

     Current average advertising prices on the Virtual Jerusalem Web community
are approximately $10 to $25 cost-per-thousand page views ("CPM"), depending
upon the length of the advertisement. To date, our typical advertisement
agreement provides for a three to six month term.

     We recently shifted our advertising focus by trying to gather sponsor
advertisers who would sponsor a whole page or channel. These sponsors would
enter into a yearlong commitment, rather than the short-term advertisement
contracts currently provided by us. Our management thinks that these sponsors
should be attracted to these sponsorship offerings since they do not have to
share our advertising space with other advertisers. In addition, this format
provides increased click-through rates while providing more brand building
opportunities for the sponsor. Several of our most recent advertisers entered
into six to twelve month sponsor agreements with us.

     E-commerce

     We have a license agreement with Intershop Communications, Inc. whereby we
are creating online shopping centers for our communities and offer our CMS
customers the ability to create their own stores and enable merchant partners to
build their own stores within the client's online mall using software developed
by Intershop and customized by the Company. (See "Licenses, Service Agreements
and Trademarks.") To date, we have introduced Intershop-powered malls on our
Virtual Jerusalem, Virtual Ireland and Virtual Italy communities.

     We believe that E-commerce vendors will be attracted to our online
communities since each community targets a well-defined, passionate demographic
group. At the same time, our users expect the desired e-commerce vendors to be
attracted to their community due to our unique content. We intend to create
stronger e-commerce relationships with our members by gathering information
about registered users' personal buying habits and "purchase events," such as
birthdays, anniversaries and holidays, and targeting those users with direct e-
mails sent in advance of the purchase events.

     To generate e-commerce revenue, we intend on entering into agreements with
vendors that will create their own stores using Intershop's software licensed to
us, which stores will be part of shopping malls on our communities. We hope to
receive a fee of $175 to $550 per month plus a 10% commission as a percentage of
the total transaction amounts made on a store from vendors who create stores on
our communities. We anticipate that each community's e-commerce opportunities
will derive from both global vendors, such as Baileys Irish Cream which has
created a store on Virtual Ireland, as well as local vendors that are
particularly focused on individual communities, such as Yenta's Unique Paper
Judaica on our Virtual Jerusalem community.

Our Marketing Efforts

CMS Business

     The market for CMS includes professional and trade associations, niche
publications and entrepreneurs that are potentially interested in creating a
targeted vertical online community, either business-to-business and business-to-
consumer related. There are approximately 130,000 professional and trade
organizations and 20,000 targeted niche publications in the United States alone.
The Gartner group estimates that the 300 current business-to-business online
marketplaces as of December 1999 will grow to 10,000 such marketplaces by 2002.

     We are currently marketing CMS in a number of different ways. We have
signed an exclusive agreement with Vanco Limited, the leading independent
network services company in Europe, to distribute CMS in the U.K. and eventually
in the rest of the European Community (see below). We intend to replicate this
relationship in additional geographic regions. We recently opened a second U.S.
office in Los Angeles to support and maintain CMS sales and operations on the
West Coast. We continue to expand our New York based CMS sales force and
operations team. We have also placed advertisements in a number of major "new
media" magazines including Business 2.0, Industry Standard and Red Herring.

     In February 2000, VCI Community Solutions, Inc., a subsidiary of the
Company, entered into a Representation and Technical Support Agreement with
Vanco Consulting Limited, a U.K. company that is a subsidiary of Vanco Ltd., a
European independent network services company ("Vanco"). Pursuant to the
agreement, Vanco markets and provides technical development and support services
for the Company in the European Community in return for which Vanco has received
exclusivity for the right to market and support CMS in E.U. countries. The
Agreement is for a two-year period provided that the Company sells a minimum of
two CMS Systems to parties introduced by Vanco during the first six months of
the term and eight CMS systems during the first year of the term. Vanco will
receive a fixed fee from the Company for each Company client in the EU for whom
it provides marketing, development and technical support services in the form of
a percentage of the cash revenues and equity received by the Company from its

                                       9
<PAGE>

customers. All of the equity received from such customers introduced by Vanco to
the Company will be placed in escrow on behalf of the parties pending a decision
by them to form a joint venture entity within a year from the date of the
agreement. In the event the parties do not do so, the equity will be distributed
60% to the Company and 40% to Vanco.

     In addition to its marketing duties under the agreement, Vanco will be
responsible for coordinating the development of an introduced party's online
community project, providing design and programming services, technical support,
training and back up services. Vanco will also be responsible for acquiring all
components of the network structure required to host, operate and back up the
introduced parties' communities with the exception of servers that shall be
provided by VCI. Vanco will also provide 24/7 emergency support lines. VCI is
responsible for providing training to Vanco staff and marketing and technical
consultations and documentation.

Online Communities

     We currently market our online communities by:

 .  engaging in comprehensive advertising campaigns, including print
advertisements, radio spots, direct mail and online advertising, designed to
introduce each of our Web sites to our targeted audience in the United States;

 .  disseminating press releases to announce the launch of our new Web sites,
additional features and the addition of new content partners; and

 .  contracting with our content partners to publicize their affiliation with our
Web sites to their constituent organizations and members, and encouraging these
partners to link their Web sites to our Web sites (e.g., the International
Christian Embassy in Jerusalem created a link to Virtual HolyLand).

 . indexing our Web sites on the Internet's major search engines.

Specific marketing efforts for Virtual Jerusalem

     We have a multi-month significant keyword campaign for the Virtual
Jerusalem Web site on Yahoo! and a major print campaign that includes the
placement of full-page advertisements in most major Jewish weekly and monthly
publications across the United States.

Specific marketing efforts for Virtual HolyLand

     The marketing campaign for Virtual HolyLand includes online, print and
radio advertisements in well known Christian Web sites, magazines and radio
shows including that of Pat Boone, a well-known Christian entertainer who has
served as official spokesperson for Virtual HolyLand in the past, promoting
Virtual Holyland at trade shows and on his nationally syndicated radio program
in consideration for a monthly fee.

Specific marketing efforts for Virtual Ireland

     The marketing campaign for Virtual Ireland includes online, print and
television advertisements in an effort to introduce this Web site to the Irish
community in the U.S. during the third and fourth quarters of 1999. We also
sponsor sweepstakes on the Virtual Ireland site for free trips to Ireland in
order to encourage registration on the site.

Specific marketing efforts for Virtual Italy and Virtual India

     Marketing campaigns for Virtual Italy and India, to be re-launched in the
second and third quarters of 2000, respectively, will include newspaper and
other print and online advertisements, promotions and grass roots efforts with
organizations in the Italian American and Indian communities, respectively.

Competition

CMS Business

     To create vertical online communities, organizations, and traditional
offline businesses, entrepreneurs are presented with a number of choices. They
can select a web development firm, Application Service Provider, ("ASP"),
content publishing software house and a host of other consulting services to
provide a solution to their Web needs. To create a robust community requires
building a Web presence that will generate repeat traffic, create member
registrations, provide targeted and timely content and allow for advertising and
revenue generating e-commerce opportunity. A potential CMS client needs to reach
its market quickly in a cost-efficient manner. In such circumstances outsourcing
an online community to multiple vendors or developing the same in-house is a
costly and time-consuming process requiring $2-4 million and 6-12 months.

     CMS provides a significant advantage over its competitors in this regard.
CMS provides a complete, single-source solution to creating, developing and
managing robust online communities. We believe that our fee, split between cash
and equity, is attractively priced to be competitive with other providers of
content management software and community building services. We also believe
that our ability to commit to creating online communities within a 90-day period
provides us with a strong competitive edge due to the desire of potential
clients to create communities as quickly as possible.

     We face competition from a number of sources, including potential entities
that perform Web site development services in-house or contract with others for
such services. These sources include Web site service boutique firms, including
Vignette Ltd., a British company, OpenMarket, Inc., a Massachusetts company,
Interwoven, a U.S. company, on-line services companies, advertising agencies,
direct access Internet and Internet-services and access providers as well as
specialized and integrated marketing communication firms, all of which are

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entering the Web site design and development market in varying degrees. Many of
our competitors or potential competitors have longer operating histories, longer
client relationships and significantly greater financial, management,
technological, development, sales, marketing and other resources than we have.

Online Communities

     As described below, we have a variety of competitors for each of our
communities and for each of the markets in which these entities operate. In
addition, we acknowledge that there are many other Internet companies, such as
theglobe.com, Geocities and Xoom.com, that attract significant numbers of
registered users to their "community" Web sites that may compete for our
potential users, registrants, content partners, advertisers, e-commerce vendors
and sponsors. However, our management thinks that most of these Web sites focus
primarily on providing free personal web pages to their users and do not offer
the same level of a targeted demographics and information that our Web sites
offer. Moreover, our management thinks that Web sites like ivillage.com target
communities that are so broad (e.g., women) that focused e-commerce and
advertising may become difficult.

     Competitors to Virtual Jerusalem

     We have numerous competitors in the Jewish and Israeli Web markets,
including, but not limited to: Jewish Communities On-Line (on America OnLine);
JAN (wwwjcnl8.com; general commercial Jewish Web sites); Shamash
(www.shamash.org; a non-profit Jewish communal network); Shema Yisrael
(www.shemayisrael.co.il; a non-profit Ultra Orthodox site); and the Jerusalem
Post (jpost.co.il; the on-line edition of the newspaper).

     Competitors to Virtual HolyLand

     In the Evangelical Christian market, our primary competitors are
crosswalk.com (published by Didax, Inc.), Jesus2000.com, cbn.com (published by
the Christian broadcasting Network) and other Web sites published by ministries
and evangelists.

     Competitors to Virtual Ireland

     Our competition for Virtual Ireland include The Irish Times Web site
(www.ireland.com), Local Ireland (www.local.ie; a governmental Web site financed
in part by Telecom Eireann), Ask Ireland (sponsored by the Irish government) and
Touchtel's tourist information site (www.goireland.com). Other competitive Web
sites include paddynet.com, irishabroad.com and celtic.com containing local news
and free e-mail services.

     Competitors to Virtual Italy

     Our competition for Virtual Italy includes DolceVita (www.dolcevita.com; a
fashion and travel site), Made in Italy (www.made-in-italy.com; a travel and e-
commerce site) and Virtual Italia (www.virtualitalia.com; a general Italian
interest site).

     Competitors to Virtual India

     Competitors to virtualindia.com include: Rediff on the Net
(www.rediff.com), an India-oriented online service), India-Today (www.india-
today.com, a news and cultural site) and 123india.com (www.123india.com, a news
information and software site).

Potential future competitors

     In addition to current competitors, given the low barriers to entry, it is
likely that additional competitors will enter our markets in the future, and
that many of such competitors will have substantially greater financial,
management, technological, sales, marketing and other resources than we have. We
cannot assure you that in the future we will be able to compete successfully in
any of our current markets, and our inability to do so would have a material
adverse impact on our business, financial condition and operating results.

Cortext Web Publishing and Content Management Software

     The central component of CMS is Cortext Web Publishing and Content
Management Software. (see "Technology Acquisitions"). Cortext provides Web
publishers with the tools required for creating and maintaining a continually
generated Web site. Cortext consists of a suite of products designed to solve
the problems of creating and maintaining Web site publishing by aiding in the
following:

 . management of data flow from text form to published Web site form through to
data  archiving;
 . editing data at each stage of the publishing process;
 . creating attractive and sophisticated designs in HTML language;
 . publishing a Web site as required (up to several times a day); and
 . technical administration.

     Cortext software can be used to build, edit and manage online communities
and Web sites of all sizes and requires little technical experience to permit
flexible development of Web sites. Cortext "object oriented" software manages
the publication of large quantities of data from PCs to Internet sites. The
application program for Cortext is written in open source code Perl language
software and uses industry standard databases. To help ensure the longevity of
Cortext as a publishing tool, Cortext was developed with an open industry
standard development platform and development tools to reduce development risks.

How Cortext Works

     Cortext prompts a user for data on a "User Entry Screen" which is a data

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entry screen on a database. This screen allows for the simultaneous entry,
modification and deletion of data while immediately and automatically updating
the associated Web pages of a Web site. By utilizing Cortext software, Web
publishers can directly interact with the database screens via the Internet.
Once data reaches a site by means of a standard database, Cortext allows for the
further editing of the published data by enabling the user to select the
articles, stories, graphics, or other components to be published on the
Internet. The remainder of the data may be kept or archived to be used at a
later date. The selected information is then transferred from the database and
published "live" on the Internet by simply selecting the "publish" key. The
publishing process can take place as many times as required, making it
convenient to publish information that changes daily or even hourly, such as
breaking news.

     Cortext software also allows for the easy removal of content published on
the Internet. Content may be saved for future use, by moving it to a viewable
and searchable archive or by simply removing it from the database altogether.
Cortext is designed to make it relatively easy and efficient for Web publishers
to alter their content contributions and dynamically update their online
communities as often as they wish while providing a powerful search and
archiving tool that does not require programming or production resources.

     Cortext is also designed to allow the loading of existing text files and
graphics, in any format, to a database Web site, via an Internet browser. This
freely available Web interface allows for this function to be done from one's
office, home or abroad with password security protection.

     In July 1999, we entered into a software license agreement with Cortext
Ltd., an Israeli company that develops content management software. Pursuant to
the agreement, Cortext licensed to us, on a worldwide, royalty free, non-
exclusive, transferable, perpetual and sublicenseable basis, a Web publishing
tool kit software developed by Cortext. We may use the software for our online
communities and for web sites maintained by our content partners. The agreement
also allows us to resell and distribute the software to third parties under
certain conditions. The agreement also calls for Cortext to provide support
services for the software and upgrades to the same if and when developed by
Cortext. In addition, Cortext shall provide development services for the
software to us for a period of six months from the completion of milestones set
forth in the license agreement. We acquired a majority stake in Cortext Ltd. in
February 2000.

Community Management Solution (CMS) Modules

     Our management believes that based on programming elements we have
developed to date, existing licenses, future licenses that we intend to obtain
from Internet service providers, equipment we have acquired and Virtual
Communities Israel, Ltd.'s design, programming and software development staff,
we can offer an array of interactive modules to Web publishers through our
Community Management Solution (CMS). We already employ many of these modules
successfully on our own online communities. The modules which we either
currently license, or are in the process of securing licenses for, include:

 . Site Search and Polling Engines;
 . Sweepstakes Modules;
 . Greeting Cards;
 . Weather Services;
 . E-mail an Article to a Friend;
 . Free User E-mail Services;
 . Registered User Databases;
 . E-mail List Servers;
 . Advertising Management Systems;
 . Bulletin Boards / Forums;
 . Comprehensive Statistics and Traffic Measurement Modules;
 . Site Indexing;
 . E-Commerce Solutions;
 . Chat Services;
 . Online Classifieds Advertising;
 . Free User Created Home Pages;
 . Games Modules;
 . Calendars; and
 . Auctions.

(See "Proprietary Technology, Trademarks and Licenses" for a description of
licenses presently owned by us.)

     To create an online community for a Web publisher, we first create a design
template. Content appropriate to the publisher's community is then inserted into
the design template. A design template could potentially include multimedia
(video or audio), graphics or text components, as required. Headlines, search
boxes or Web links to other content stories can be included on each Web page.
Additional modules, including poll questions, quizzes, greeting cards, chat and
other interactive features may also be added. By integrating data and design, we
provide Web site publishers with complete control over the presentation of their
content on the Internet.

     To complete our Web design and development services, our technical and
support services include system administration, programming integration of all
components of a Web site, project management and hosting of Web sites on our
servers. Frontier Global Inc., pursuant to an agreement, monitors our servers
continuously for connectivity and power with us. In addition, we maintain
Firewall protection and other security services such as secure servers for
financial transactions.

     Significant Customers.   The five largest community advertising clients
accounted for over 47% of total revenue in 1999, with Continental Airlines
accounting for approximately 22% of such total revenue. The agreement with
Continental Airlines, executed in May 1999, is a barter advertising agreement
largely for airline tickets, equivalent in value to $150,000, in exchange for
advertising placements on the Virtual Jerusalem site for equivalent value. This
contract is currently being renewed at approximately the same value. Due to
shift of business to the CMS sector, Management does not believe that our
success will depend largely upon our ability to broaden and diversify our
advertising base. If we lose advertisers, fail to attract new advertisers or are
forced to reduce advertising rates in order to retain or attract advertising
clients, our business, financial condition and operating results would not be
materially adversely affected.

Licenses, Service Agreements and Trademarks

Cortext

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     For a detailed description of Cortext, see "Cortext Web Publishing and
Content Management Software" and "Technology Acquisitions."

E-Commerce

     In September 1999, we entered into an agreement with Intershop
Communications, Inc., a San Francisco, California based developer of e-commerce
software and applications. Pursuant to the agreement, Intershop granted us a
license to software that allows us to design and build on-line stores from
existing templates and create on-line "malls" for each of our communities and
Community Management Solution customers. The software also allows us to create
online stores for our content partners, or, alternatively, provide them with the
ability to build their own e-commerce solution. Pursuant to the agreement,
Intershop provides us with continuous support services and software upgrades. We
pay Intershop a license fee for the software products and an annual customer
service fee for Intershop's ongoing support services and software upgrades. The
agreement is for a period of three years with automatic renewal for additional
one-year terms unless terminated by either party upon 30 days written notice.
The licenses granted to us under the terms of the agreement survive the
expiration or earlier termination of the agreement.

Advertising Management System

     We have a license agreement with NetGravity, Inc., a California company
that provides software-enabling licensees to manage advertising on their Web
sites. Our license is a perpetual, worldwide, non-exclusive and non-transferable
license that enables us to manage advertising on our own Web sites and on Web
sites of our content partners as well as any other Web sites residing on our
servers. In exchange for this license we pay NetGravity a one-time license fee
for the first year plus an additional fee for support services during the first
and successive years of the license. An optional subscription maintenance for
the second year of the license is also available for an additional fee.
NetGravity may terminate the license upon thirty days notice to us if we are
delinquent in our payments to NetGravity.

Server Maintenance and Support

     We have a Master Service Agreement with Frontier Global Inc., a California
internet service provider, that provides us with hosting services and
connectivity to the Internet for our servers on which our own Web sites and the
Web sites of our content partners reside. Global Center also provides continuous
supervision of our servers ensuring that such servers are connected to power
sources and viewable on the Internet. Global Center also assists in correcting
any possible malfunctions of our servers, which are housed at Global Center's
server installations in Herndon, Virginia and New York City. For these services,
we pay a monthly fee. Per the agreement, Global Center is not liable for injury
to our business, lost revenues or profits resulting from any  negligence on
their part at our server maintenance facilities. The initial term was for a
period of six months starting September 4, 1997 which term has been extended for
several additional six-month periods.

Web User Tracking Software

     In December 1999, we entered into a Software License and Support Agreement
with iMediation Inc, ("iMediation"), a California company that provides web user
tracking software. Pursuant to the agreement, iMediation has granted us a three-
year license for its use of iMediation software that enables the automated
tracking of web traffic to or within our online communities and/or those
communities maintained by us. In addition to a software license fee, we pay an
additional fee for software support services during the term. We are entitled to
use the software on up to eight of our communities. Thereafter, we must pay an
additional fee on a per community basis. We have the right to convert this
license into a perpetual license for a flat rate for up to 20 communities. The
agreement is for a total of 3 years, however, it may be terminated at the end of
each year.

Instant Messaging

     In March 2000, we entered into an agreement with Tribal Voice, Inc., a
wholly owned subsidiary of CMGI, a Delaware corporation, to create co-branded
versions of its "PowWow" technology for any of our communities.  The "PowWow"
technology provides users with text and voice communications (such as instant
messaging), group activities and sharing of information. Tribal Voice also
provides us with continuous support and software upgrades.  The agreement is for
a period of three years with automatic renewal for additional one-year terms
unless terminated by either party upon 60 days written notice.  We have the
ability to terminate the Agreement at any time during the term upon 30 days'
written notice.

E-mail List Services

     We have a license agreement with Revnet Systems, Inc., an Alabama company
that provides software for e-mail list processing applications. The agreement is
a license for a product developed by Revnet called "Unity Mail Server" that
enables the licensee to establish and manage information distribution lists or
groups while allowing participation by third party subscribers. The license
provides for unrestricted subscriber capacity for a period of one-year starting
December 31, 1998, and includes free upgrades and technical support.

Free E-mail Services

     We have a custom e-mail service agreement with CommTouch Software, Inc., a
California company that provides Web-based e-mail products and services. The
agreement requires CommTouch Software to provide us with a customized e-mail
service, including upgrades hosted on CommTouch Software servers. These services
are available for our Web sites and other Web sites residing on our servers.
These services allow us to provide users of our online communities with free e-
mail addresses and allow us to advertise on the e-mail

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messages mailed by our users. Per the agreement, CommTouch Software is required
to customize the e-mail services to each of our own Web sites and provide
continuous customer support service. The agreement also obligates us to place
Web links on the custom e-mails back to CommTouch Software's service pages, to
actively promote CommTouch Software's service on our Web sites and in other
media in order to attract end users to the service, to use commercially
reasonable efforts to market and sell advertisements for the custom e-mail
service, and to pay CommTouch Software a quarterly fee according to revenue
sharing arrangements. The term of the agreement is for one year starting June
30, 1999.

Free Home Pages

     In August 1999, we entered into an agreement with Homestead Technologies,
Inc., a California company that develops co-branded sites where Internet users
may create free personal homepages. Pursuant to the agreement, Homestead and we
will create sites co-branded using technology developed by Homestead. Homestead
will provide us with all necessary hardware, software, and bandwidth necessary
for the co-branded sites. We are obligated to promote such site on our
communities and email newsletters to our registered database and maintain links
to the co-branded sites from our communities. In consideration for us providing
Homestead with access to our registered user base and collective statistical
data on users of the co-branded sites, Homestead creates the co-branded sites
and pays us a portion of revenues from advertisements placed on the user
homepages. We may also place banners on the co-branded site pages and retain a
percentage of revenues collected from the same. The parties also agree to create
an integrated registration process for the free home page service.

Auction Services

     In March 2000 we entered into an agreement with OpenSite Technologies,
Inc., to obtain a perpetual, worldwide license to their AuctionNow software,
which enables the creation of branded, online auction galleries. OpenSite also
provides us with free upgrades and maintenance and support.  Under a separate
agreement simultaneously entered into with OpenSite, we are also an authorized
reseller of the OpenSite software.

News Services

     In September 1999, we entered into an agreement with Reuters Limited, a
U.K. company, for the supply of Reuters' online media services for distribution
on our communities. The agreement calls for Reuters to supply our world news
services, including a number of daily print and audio stories and photographs
and a license for software designed to receive, classify and manage the news
stories, photos and graphics transmitted from Reuters to us. We pay a monthly
service fee for these news services. The agreement is for a period of two years.

Customized Content

     In December 1999, we entered into an agreement with ScreamingMedia.Net,
Inc., a Delaware corporation for customized content for use on VCI's Virtual
Ireland, Virtual Italy and Virtual India communities. The agreement calls for
ScreamingMedia to supply us with news and information from a wide range of
content providers via ScreamingMedia's content engine technology that employs
custom filters created for each of its clients. In addition to a set-up fee, we
pay ScreamingMedia a monthly fee for the service. The term of the agreement is
one year, with automatic renewal for additional one-year periods unless
terminated by either party on 90 days written notice.

Currency Converter

     In February 2000, we entered into an agreement with OANDA Corp. to have the
ability to create co-branded versions, for any of our communities, of its
currency converter software that enables users to access current foreign
exchange data and conversions. OANDA provides us with continual technical
support.  Should OANDA fail to ensure continued functionality of the service, we
may terminate the Agreement upon 15 days' written notice.  The Agreement is for
a period of two years.

Promotion and Loyalty Programs

     In March 2000, we entered into an agreement with iQ.COM Corporation to
license their software, which enables the creation, targeting, distribution and
tracking of sales promotions and loyalty programs.  IQ.COM also provides us with
free upgrades and support.  Should we not be reasonably satisfied with the
performance of the software, we may terminate the agreement upon 30 days'
written notice.  The agreement is for a period of one year with automatic
renewal for additional one-year terms unless terminated by either party upon 60
days written notice.

Chat Services

     We have an agreement with Talk City, Inc., a California company that
provides supporting software that enables Web sites to offer chat services to
their users. Per the agreement, Talk City provides us with all necessary
facilities, servers, connectivity, related equipment and technology to host chat
rooms on our servers. Talk City is responsible for continuous coverage of the
chat rooms to ensure the enforcement of their Code of Conduct. Talk City is
responsible for selling and managing advertising on the chat room sites, however
we may also sell advertising but must pay a percentage of gross revenues
collected by us to Talk City. The agreement requires us to pay Talk City an
annual fee for our three online communities and up to an additional fifteen Web
sites. The term of the agreement is for one year starting June 17, 1999 and is
automatically renewed for additional one-year terms unless canceled on thirty
days notice by either party.

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Weather Services

     We have a license agreement with Accuweather, Inc., a Pennsylvania company
that provides online weather services. The agreement, as amended, requires that
Accuweather make available to us selected weather forecasts, satellite images
and other weather services for our three existing online communities, including
forecasts for cities of specific interest to each community and general weather
information for over 450 cities around the world. The term of the agreement is
for 18 months starting December 22, 1998, and Accuweather may terminate the
agreement on 30 days written notice in the event of a breach of the agreement by
us. We pay Accuweather a monthly fee for such services, but are entitled to 25%
of any revenues received by Accuweather from users of our Web sites who
independently subscribe for additional Accuweather services.

OnLine Bulletin Boards/Forums

     We have a license from DiscusWare, LLC, for a popular freeware discussion
board software package called "Discus" which we use on our online communities.
Discus allows visitors to our communities to read and post messages.  The
license permits us to modify the source code for our own use, however, this
license may not be resold or distributed.

Internet Camera

     We have a non-exclusive, non-transferable license agreement with Perceptual
Robotics, Inc., an Illinois company that provides the software, maintenance and
support required to manipulate an interactive camera on the Internet. The
software allows up to twenty simultaneous users to control a telerobotic camera
and view panoramic images within Jerusalem. The license's term is for one year
starting September 3, 1998, for which we paid a flat fee excluding annual
software support and upgrades.

NT Server Licenses and Microsoft Office Software

     We have licenses from Microsoft for the use of our Microsoft Office
software on PCs and the PCs of our subsidiaries' employees in the U.S. and
Israel. We also have  access licenses from Microsoft for our Windows NT server
software, required for the operation of our computer servers on which our Web
sites and the Web sites of many of our content partners reside.

Maven Index and Search Engine

     We have an agreement with Matthew Album, an individual who developed a
comprehensive, proprietary database of over 10,000 Jewish related Web sites
known as the "Maven Index" which resides at www.maven.co.il. Per the agreement,
we provide Maven with technical, Web site design, hosting, marketing and e-mail
services and Mr. Album, in exchange, updates the Maven database regularly and
provides technical services required to operate the database. The term of the
agreement is three years starting March 9, 1998, and contains a license that
permits us to publish Maven on the Virtual Jerusalem site while requiring Mr.
Album to place Web links on Maven to that site's homepage. Mr. Album and we
evenly split revenues from advertisements placed on Maven. In the event the
agreement is terminated by us for cause, or by Mr. Album without cause, we
receive a non-exclusive right to use Maven. For five years following such
termination (provided that Maven remains on the Virtual Jerusalem site), we are
obligated to pay Mr. Album a decreasing portion of the advertising revenues that
we derive from Maven.


We Currently Operate Five Online Communities

     We currently operate five online communities: Virtual Jerusalem, Virtual
HolyLand, Virtual Ireland, Virtual Italy and Virtual India. A brief description
of each is provided below.

Virtual Jerusalem

     Virtual Jerusalem, located on the Web at www.virtualjerusalem.com,
aggregates a variety of Jewish and Israel related content from the Web as well
as offering interactive features and services. This Web site includes a portal,
called the Maven Index, to over 10,000 Jewish related Web sites. Popular
elements include the Kotel Kam (an Internet zoom camera which transmits live
pictures of the Western Wall), "Send a Prayer to the Western Wall" (permitting
members to post a message online that is downloaded by us and placed in the
Western Wall) and "Time Travel Through Jerusalem" (which features multi-media
tours by historical figures). Virtual Jerusalem also contains a series of Jewish
Holiday Web pages with games, quizzes and a variety of educational content. The
Web site also offers members a range of community features and services
including forums, free e-mail, personal Web pages, interactive guest book,
global weather forecasts and classified advertisements. Virtual Jerusalem
contains several channels, each of which features topical content
that is updated daily. These Channels, and their descriptions, include: News,
Travel, Business, Torah (religious material), Living (sections on health and
parenting, books, films, Jews in sports, music, dance, humor, art, drama and
self-improvement) Food, History and Teens. In late 1999, we launched
vjradio.com, a Web site on which 24 hour audio programming is available via
real-time streaming technology. Programming includes regularly scheduled Israel
news, music and audio features from Virtual Jerusalem's content partners
interviews with well known Jewish personalities and others with whom we intend
on entering into content relationships for use of their audio content on the
Internet.

Virtual Jerusalem's target market, registered user base, user demographics and
traffic statistics.

According to the 1998 American Jewish Yearbook (published by the American Jewish
Committee), the Jewish population in the United States is approximately six

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million, as compared to a world Jewish population of 13 million. According to
Jupiter Communications, approximately 38% of Americans currently use the
Internet. Assuming the same Internet usage by the Jewish population as the
general population, the current number of Jewish Internet users based in the
United States is approximately 2.3 million. Our management thinks that based on
the relatively high socioeconomic profile of this population relative to the
general population as a whole, the number of Jewish Internet users based in the
United States could be as much as 50% more than this figure, or up to
approximately 3.4 million people. Virtual Jerusalem has approximately 188,000
registered users as of April 10, 2000 and recorded approximately 5.7 million
page views in March 2000. Virtual Jerusalem is currently adding 5,000 to 6,000
new registered users each month.

     According to the 1997 Annual Survey of American Jewish Opinion (conducted
for the American Jewish Committee by Market Facts, Inc.), 55% of American Jews
claimed that being Jewish is very important in their lives and 34% percent of
American Jews claimed it was "fairly" important. According to this same survey,
American Jews rated being part of the Jewish people as the quality most
important for personal Jewish identity, and the celebration of Jewish holidays
as the activity most important for personal Jewish identity. Virtual Jerusalem
focuses on both these elements by offering comprehensive news and features
relating to the Jewish community and Israel and a comprehensive selection of
Jewish holiday "megasites" containing a host of interactive elements and
activities geared to all ages.

Virtual Ireland

     Virtual Ireland, located on the Web at www.virtualireland.com, was launched
on Saint Patrick's Day 1999 and aggregates content from a variety of Irish Web
sites on the Internet. Virtual Ireland offers members a range of interactive
elements, community features and services including bulletin boards, free e-
mail, global weather forecasts, pen pals, video and audio files, a shopping
center and greeting cards. The Web Site also offers five Channels including:
News, Travel, Geneology, Business and the Craic (Entertainment).

     In addition to using Irish related content from Screaming Media and
Reuters, the Company has agreements with several content partners for the use of
their content on Virtual Ireland. These partners include Appletree Press--
Ireland's Eye (one of Ireland's largest book publishers), WildIreland, IAIS
(Irish American Information Service), The Irish Emigrant (an Irish newspaper),
Irishfood.com (a Web site featuring foods from Ireland), Irishradio.com,
Regional Media Bureau of Ireland (a publisher of 27 local Irish newspapers), The
Irish World Online, Gathering of the Irish (irishclans.com), Boston Irish Pub
and Restaurant Guide, CELT (Corpus of Electronic Texts).

Virtual Ireland's target market, registered user base, user demographics and
traffic statistics

     There is an estimated world Irish Diaspora of approximately 70 million
people. In the United States, according to the United States Census Report for
1998, 39 million people consider themselves to be of Irish descent. This report
also estimates that Irish families comprise approximately 9% of the total
population of the United States, but account for approximately 12% of households
with a net worth of more than $1 million. Our management thinks that the strong
ties of Irish descents to their heritage represent a significant potential
demographic market. We are currently running numerous print, radio and
television media directed towards this large American Irish population. Over
65,000 users have registered on Virtual Ireland since our launch in March 1999
and the site recorded approximately 1.5 million page views in March 2000.

Virtual HolyLand

Virtual HolyLand ("VHL"), located on the Web at www.virtualholyland.com, was
launched on Christmas Day 1998 and aggregates content from a variety of
Christian Web sites on the Internet. VHL offers visitors a wide range of
community features and services including chat rooms and forums, free e-mail,
personal Web pages, interactive guest book, global weather forecasts, classified
advertisements, virtual tours of Christian places of interest and a planned
online shopping experience. VHL also offers Channels featuring up-to-the-minute
news from Israel, Millennium-related activities, prayer, travel information and
interactive elements.  These Channels include: Christian Life, Land of Promise,
Israel News, ZionTraveler, Prophesy, Christian Bookstore Online and Family.
Virtual HolyLand has agreements with several content partners, including Bridges
for Peace and the International Christian Embassy.

Virtual HolyLand's target market, user demographics and site statistics

     According to the National Survey of Religion and Politics, the number of
evangelicals in the United States, as determined by assessing denominational
affiliation, including membership in evangelical churches and ministries, totals
approximately one quarter of the United States population, or approximately 70
million people. Virtual  HolyLand is targeted at these estimated 70 million
potential users.

     Evangelicals believe in a diversity of religious movements. According to
estimates of the National Survey of Religion and Politics ("NSRP"),
approximately 35% of the population of the United States identify themselves as
evangelical Christians. Baptists, Methodists, Assembly of God followers, and
Pentecostal followers are included in these estimates. According to the NSRP,
three quarters of evangelicals in the United States do not identify with a
specific religious movement and may relate to specific personalities or
ministries such as the Reverends Billy Graham, Oral Roberts, Pat Robertson, John
Haggert, Jack Halyford, Kenneth Hagan, Jimmy Swaggert and Chuck Smith.

     In demographic terms, evangelicals closely resemble the population of the
United States at large with regards to gender and age, and trail the average
population only modestly in education and income. SOMA Communications, Inc., a

                                       16
<PAGE>

Christian broadcast market research firm, estimates that over 70% of Christians
in the United States who use the Internet have annual incomes in excess of
$75,000, and Christianity Today, a publisher of Christian periodicals, estimates
that American Christians are 25% more likely to own a computer and 15% more
likely to own a modem than the general population of the United States. Although
their demographics indicate higher levels of religious commitment, their profile
largely resembles that of the rest of the population of the United States. Based
on estimates of the current Internet usage in the United States of 38% of the
population, our management estimates that there are approximately 27 million
potential users of Virtual HolyLand from this target community alone. VHL had
approximately 25,000 registered users as of April 10, 2000 and recorded
approximately 420,000 page views in March 2000 compared to approximately 10,000
page views in March 1999.

Virtual Italy

Virtual Italy, located on the Web at www.virtualitaly.com, was created on
Columbus Day in October 1999 and relaunched in April 2000. Virtual Italy offers
a variety of content and interactive elements targeted to persons interested in
Italian culture, the Italian American community in particular. In addition to
daily news and weather, Virtual Italy offers free email addresses and personal
homepages, greeting cards, chat rooms and forums, guest books, and quizzes. The
site's channels include: Today in Italy (News), Travel, Geneology, La Cucina
(Cooking) and Divertimenti (Entertainment).

Virtual Italy's target market, registered user base and user demographics and
traffic statistics

     There are an estimated 15 million persons in the United States who identify
themselves as Italian Americans according to the Population Division of the 1990
U.S. Census Bureau. However, the Census Bureau estimates that as many as one in
ten Americans are descended from Italian families and that Italian Americans are
the fifth largest ethnic group in the U.S. with their population concentrated in
the Northeast, California, Florida and Illinois. The average Italian American is
a city dweller, college educated and had an average annual income of $33,000.
Due to the recent launch of the Virtual Italy site in October 1999, we have not
collected statistics on the site. We launched Virtual Italy with an ad campaign
on Yahoo! and a public relations effort and we intend to roll out a
comprehensive marketing campaign for the site during the first quarter of 2000.
This will include newspaper and other print and online advertisements,
promotions and grass roots efforts with organizations in the Italian American
community. Approximately 3,000 persons have registered on Virtual Italy since
its creation in October 1999 and we recorded approximately 50,000 page views for
Virtual Italy in March 2000. The Company expects that interest in this community
will increase with its re-launch after hiring an  editorial team in March 2000.

Virtual India

     Virtual India, located on the Web at www.virtualindia.com was introduced
during the Diwali Festival in November 1999 and places the latest news from the
India world alongside interactive elements that allow community members to
interact in a family safe environment. Virtual India is targeted to the Indian
American community and others interested in Indian culture and news. Virtual
India offers free email addresses and personal homepages, greeting cards, chat
rooms and bulletin boards, global weather reports, pen pal searches and games.
The site includes the following channels: News, Travel and Food. We recently
hired an Editor and editorial team to administer the Virtual India site and
enter into additional content partner agreements for use of content on the site.
The formal launch of Virtual India will occur in July 2000.

Virtual India's target market, registered user base and user demographics and
traffic statistics.

     There are an estimated half million persons in the United States who
identify themselves as Asian Indian Americans according to the Population
Division of the 1990 U.S. Census Bureau. Though Indian population is growing
with a 111 percent increase between 1980 and 1990, Asian Indians tend to live in
and around major metropolitan areas. Asian Indians made up 1.2 percent of New
York City's population in 1990. In 1990, 30 percent of Asian Indians were
employed in professional specialty occupations, compared with 13 percent of all
U.S. employees. The median annual income for Asian Indian households is $44,700.
Due to the recent launch of Virtual India in November 1999, it has not yet been
possible for us to collect meaningful statistics from the site. We are currently
in the process of hiring extra staff for the site and intend to launch a
strategic marketing campaign during the third quarter of 2000.

Content Partners

     A key component of our business strategy for our communities is our
relations with our content partners. Our management thinks that these content
partners recognize the benefits of being anchored to a community which include
some or all of the following:

 . exposure of their Web content to additional readership beyond that which their
Web site alone attracts;
 . increased traffic on their Web sites generated by the links from our
communities to their sites;
 . the opportunity to earn revenues from shared advertising on co-branded Web
pages; and

 . the receipt of Internet services from us through an interactive panel which
may be laced on their sites called iPanel which includes links to chat services,
weather guest books, online forums and e-mail lists that would otherwise require
expensive and multiple licenses and technology.

                                       17
<PAGE>
Our Efforts to Accumulate Registered Users

     We encourage user registration on our Web sites in several ways. Several
interactive elements on our Web sites, such as our user-controlled web camera on
Virtual Jerusalem and Virtual Holyland require registration in order for users
to access such features. We also encourage visitors to register by offering
sweepstakes for valuable prizes, including weekly trips to Israel (on the
Virtual Jerusalem and Virtual HolyLand Web sites) and trips to Ireland (on the
Virtual Ireland Web site). Entry to the sweepstakes requires registration.

Trademarks

     In April 1999, we filed five service mark applications with the Assistant
Commissioner for Trademarks in the United States for the following names and
designs used by us: Virtual Communities, Inc., Virtual Jerusalem, Virtual
HolyLand, Virtual Ireland and IsraelWire, together with designs for each of
them. The applications are currently under review by the U.S. Trademark Office.
These names and service marks for these sites are currently used in our
business. We intend to file additional applications for other online communities
and Web properties that we may establish in the future, including an application
for vjradio.com. There is no assurance that we will be successful in obtaining
approval of such applications, and if obtained, of enforcing such service marks.
We are aware of the fact that there are a number of entities incorporated in a
number of states in the U.S. that currently use the name "Virtual Communities"
and that at least one such entity has filed an application for protection for
such name, although such entity provides somewhat different Internet services
than we do. Our management cannot assure you if and when the U.S. Trademark
Office will rule on such applications, or that such applications will ever be
granted or enforceable.

Technology Acquisitions

     In February 2000, we entered into a Share Purchase Agreement ("SPA") with
Cortext Ltd., and the principal shareholders of Cortext, to acquire a majority
interest in the equity of Cortext Ltd., which was established in 1996. VCI
currently utilizes Cortext's Magazine Software pursuant to a License Agreement
with Cortext dated July 18, 1999 to manage content on several of the ethnic
communities published by VCI and as a central component of its Community
Management Solution (CMS) turnkey solution which it markets and licenses to
third party web publishers and uses for its own online communities.

     Pursuant to the terms of the SPA, VCI was issued shares of Cortext so that
it currently holds approximately 54% of the outstanding shares of Cortext
following the payment of certain funds to and on behalf of Cortext. Depending
upon Cortext's completion of certain software development milestones set forth
in the SPA and additional payments by VCI, up to 60% of the equity of Cortext
could be acquired by VCI by August 2000.

     Simultaneously with execution of the SPA, VCI and Cortext entered into an
Assignment Agreement with Planet Communications Ltd. ("Planet"), an Israel-based
unaffiliated third party holder of 50% of the rights in Cortext's software
whereby Planet agreed to irrevocably assign all of its rights, title and
interest in the Magazine Software to Cortext in consideration of VCI's payment
of a portion of the transaction consideration on behalf of Cortext and subject
to such third party's retaining the right to sell up to ten end user licenses.
Cortext agreed to provide Planet with certain upgrades and technical support
services in connection with such End User licenses if and when the same are
granted. The majority of the payments to Planet have been made and its
assignment of its rights to the Magazine Software has been effectuated. A
portion of the payments to such third party are to be paid in installments over
a period of six months from the date of the Assignment Agreement and the SPA.
Following the assignment of the rights by Planet, Cortext holds 100% of the
rights in and to the Magazine Software.

     Concurrently with the execution of the SPA, Cortext also entered into long-
term employment agreements with its C.E.O. and C.T.O. and amended its By Laws.
Pursuant to the SPA, VCI has the right to name two members to Cortext's Board
and to name a majority of the Board upon the completion of its payments and
acquisition of shares in August 2000.

The Company does not currently need any government approval for delivery of its
principal products or services nor does it expect such approval to be required
during the foreseeable future.  The business of the Company is not materially
affected by any governmental regulations nor does the Company expect to be
subject to any special regulations during the foreseeable future, however there
can be no assurance in this regard.  The Company has not expended any material
amounts of money on research and development activities during the past two
fiscal years.  The Company has not incurred any material expenses or costs with
respect to compliance with environmental laws (federal, state and local).

Employees

     As of April 10, 2000, we, together with our Israeli subsidiaries, Virtual
Communities Israel Ltd. and V.C.I. Internet Properties Ltd., employed 133 full-
time employees, 3 of whom are located in Virtual Communities Israel, Ltd.'s
offices in Jerusalem, Israel, 2 of whom are located in V.C.I. Internet
Properties, Ltd.'s offices in Eli, Israel, 56 of whom are based in our offices
in New York, New York and 2 who are based in Los Angeles, where the Company
intends to open a CMS Sales and Marketing office in the near future. Over the
next several months, we intend to retain an additional 5 persons for Virtual
Communities Israel, Ltd.'s Jerusalem office where such personnel will be engaged
in Web site production, programming, editorial services, client services and
administration and an additional 10 persons for our New York office where such
personnel will be engaged in sales and marketing, web site development and
editorial services and administration.

ITEM 2.   PROPERTIES

The headquarters and offices of VCI and VCI's Israeli subsidiaries, VCIL and
VCIIP, are located at 589 Eighth Avenue, New York, New York 10018, Jerusalem
Technology Park, Jerusalem, Israel 91481 and Yishuv Eli 37, Eli, Israel 44828,
respectively.

The Company does not currently need any government approval for delivery of its
principal products or services nor does it expect such approval to be required
during the foreseeable future.  The business of the Company is not materially
affected by any governmental regulations nor does the Company expect to be
subject to any special regulations during the foreseeable future, however there
can be no assurance in this regard.  The Company has not expended any material
amounts of money on research and development activities during the past two
fiscal years.  The Company has not incurred any material expenses or costs with
respect to compliance with environmental laws (federal, state and local).

VCI's Web site servers are housed in server parks in Herndon, Virginia and in
New York, New York where they receive 24-hour maintenance and back-up services
pursuant to an agreement with Frontier Global, Inc.

Management believes that the condition of the Company's property is reasonably
adequate for commercial purposes.

ITEM 3.   LEGAL PROCEEDINGS

Certain shareholders, who held some of VCI Series B Preferred Stock prior to the
Merger, have notified the Company that they believe that they are entitled to
additional shares Common Stock and that they intend to commence an action in
connection with such claims. They contend that the reset price for the
conversion of the former Series B Preferred shares to the Common Stock of the
Company pursuant to the Merger agreement should have been $1.45 rather than the
$2.10 used by the Company. While the holders thereof have not filed a suit to
date, their claim amounts to approximately 170,000 additional shares of Common
Stock of the Company. The Company and its counsel believe that their claim is
without merit. The Company intends to defend vigorously any action which may be
filed against the Company and its officers and directors in connection with the
aforementioned claim.


                                       18
<PAGE>

effect on us.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On October 26, 1999, we held an Annual Meeting of Shareholders at which time our
shareholders approved our merger with VCI through a wholly owned subsidiary of
the Company, HDG Acquisition Sub, Inc. The Merger was a result of a Plan and
Agreement of Merger between VCI and us dated June 3, 1999 that was subsequently
amended on September 8, 1999 and October 28, 1999. (VCI's shareholders approved
the merger by means of a Consent of Shareholders dated as of October 26, 1999).

In connection with the Merger, our shareholders approved the change of our name
to Virtual Communities, Inc. and the issuance to VCI shareholders of 12,473,326
shares of our common stock at the exchange rate of 1.151 shares of our common
stock for each share of VCI common stock held by them so that upon the merger
VCI shareholders controlled 88.6% of the common stock of our Company with our
former shareholders holding 11.4%.

At the Annual Meeting, our shareholders voted to replace our Board of Directors
and management with VCI's Board of Directors and management.  All of our new
directors were nominated by VCI pursuant to the merger agreement. Three of such
nominees were former directors of VCI and two were our former directors. The
following persons were elected as Directors:

   Name               Age    Position
   ----               ---    --------

Avi Moskowitz........ 35     Chairman
Robert J. Levenson... 58     Director
Fred S. Lafer........ 71     Director
Jonathan W. Seybold.. 56     Director
Allan Dalfen......... 57     Director
Peter A. Jacobs...... 55     Director
David Morris......... 30     Director

(See biographical information related to these directors and our  officers in
Part III, Item 10 - "Directors and Executive Officers of the Registrant" below.)

Shareholders also approved the amendment and restatement of our certificate of
incorporation to change our name to "Virtual Communities, Inc." and to increase
the number of authorized shares of our stock to 45,000,000 shares of common
stock and 5,000,000 shares of preferred stock.

In addition, our shareholders approved an Amended and Restated By Laws which was
a condition to the obligation of VCI to consummate the merger. The new By Laws
provide, in relevant part, that:

a) the number of directors may be not less than three nor more than nine.

b) at any annual meeting of stockholders, only such business shall be conducted
as shall have been: (i) specified in the notice of the meeting given by or at
the direction of our Board; (ii) otherwise properly brought before the meeting
by or at the direction of our Board; or (iii) otherwise properly brought before
the annual meeting by a stockholder. The stockholder must give notice of the
business proposed to be brought before the annual meeting to the secretary of
the Company not less than forty-five (45) days nor more than seventy-five (75)
days prior to the date on which we first mailed its proxy materials for the
previous year's annual meeting of shareholders (or the date on which we mail its
proxy materials for the current year if during the prior year we did not hold an
annual meeting or if the date of the annual meeting was changed more than thirty
(30) days from the prior year). A stockholder's notice to our Secretary must
describe each matter the stockholder proposes to bring before the annual
meeting, the name and record address of the stockholder proposing such business,
the class and number of shares of our Company which are beneficially owned by
the stockholder, and any material interest of the stockholder in such business.

Similarly, any stockholder desiring to nominate a person to stand for election
to the Board of Directors must make a written nomination to the Secretary of our
Company not less than 45 days nor more than 75 days prior to the date on which
we first mailed its proxy materials for the previous year's annual meeting of
shareholders (or the date on which we mail its proxy materials for the current
year if during the prior year we did not hold an annual meeting or if the date
of the annual meeting was changed more than thirty (30) days from the prior
year). The notice must set forth (a) as to each person whom the stockholder
proposes to nominate for election as a director, (i) the name, age, business
address, and residence address of the nominee, (ii) the principal occupation or
employment of the nominee, (iii) the class and number of our shares which are
beneficially owned by the nominee, and (iv) any other information about the
nominee that is required to be disclosed in solicitations for proxies for
election of directors pursuant to Rule 14a under the Exchange Act; and (b) as to
the stockholder giving notice, (i) the name and record address of the
stockholder, and (ii) the class and number of shares of the company beneficially
owned by the stockholder.

c) that special meetings of the stockholders may be called by the Chairman of
the Board, the President or by a majority of the our Board of Directors.

Shareholders ratified the appointment of Arthur Andersen, LLP as our independent
auditors effective upon the Merger which was a condition to VCI's obligation to
consummate the Merger. Richard A. Eisner LLP resigned as the registrant's
certifying accountant effective upon the ratified appointment date of Arthur
Anderson, LLP.

Shareholders also approved a 1999 Stock Incentive Plan approved by our Directors
in September 1999 and a condition of the Merger with VCI. The following is a

                                       19
<PAGE>

summary of the 1999 Stock Incentive Plan:

General Description. The purposes of the 1999 Stock Incentive Plan are to give
our employees and others who perform substantial services for us an incentive,
through ownership of our common stock, to continue in our service, and to help
us compete effectively with other enterprises for the services of qualified
individuals. The 1999 Stock Incentive Plan permits the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code") only to employees of VCI or any of its parent
or subsidiary corporations. Awards other than ISOs may be granted to employees,
directors and consultants. The 1999 Stock Incentive Plan provides for the grant
of (i) shares, (ii) options, stock appreciation rights ("SARs") or similar
rights with an exercise or conversion privilege at a fixed or variable price
related to the Common Stock and/or the passage of time, the occurrence of one or
more events, or the satisfaction of performance criteria or other conditions, or
(iii) any other security with the value derived from the value of the Common
Stock of VCI (collectively, the "Awards"). Such Awards include, without
limitation, options, SARs, sales or bonuses of restricted stock, dividend
equivalent rights ("DERs"), performance units ("Performance Units") or
performance shares ("Performance Shares").

Number of Shares Reserved. The number of shares reserved for issuance under the
1999 Stock Incentive Plan is 1,000,000 shares, plus an annual increase to be
added on the first day of VCI's fiscal year beginning in 2001 equal to two
percent (2%) of the number of shares outstanding as of such date or a lesser
number of shares determined by the Plan's administrator (the "Administrator").
Of the number of shares reserved for issuance, the maximum aggregate number of
shares available for grant of ISOs is 900,000 shares, plus an annual increase to
be added on the first day of VCI's fiscal year beginning in 2001 equal to the
lesser of (x) 1,000,000 shares, (y) two percent (2%) of the number of shares
outstanding as of such date, or (z) a lesser number of shares determined by the
Administrator. The shares to be issued pursuant to Awards may be authorized, but
unissued, or reacquired Common Stock. Limiting the annual increase to no more
than 1,000,000 shares per fiscal year is designed to permit the inclusion of
ISOs within the types of Awards that may be issued under the 1999 Stock
Incentive Plan pursuant to the formula for determining the maximum aggregate
number of shares available for issuance under the 1999 Stock Incentive Plan. Our
Board of Directors recommended this amendment as a means by which the
Compensation Committee can plan on an annual basis for an allocation of ISOs
among other types of Awards sufficient to meet VCI's anticipated requirements
for attracting and retaining employees.

                                       20
<PAGE>

PART II

Item 5.
Market for Registrant's Common Equity and
Related Stockholder Matters


(a) MARKET INFORMATION

  The Company's Common Stock was quoted under the symbol "IFIT" from February
11, 1997 until October 31, 1999 on the NASDAQ SmallCap Market. In connection
with the Merger with VCI on October 29, 1999, the Company began trading its
securities on November 1, 1999 under the symbol "VCIX" for the Common Stock,
VCIXU for the Units, VCIXW for the Class A Warrants and VCIXZ for the Class B
Warrants. The following is a list of the low and high bid quotations by fiscal
quarters for 1999 as reported by NASDAQ:

                                   1999            1998

                                Low    High     Low       High
                                ---    ----     ---       ----

Quarter ended March 31, 1999    $ .81  $1.50    $2.25     $1.50
Quarter ended June 30, 1999      1.46   4.68     1.00       .5625
Quarter ended Sept. 30, 1999     2.56   4.50     1.0938     .5625
Quarter ended Dec. 31, 1999      3.00   4.68     1.1875     .4374


The quotations reflect inter-dealer prices, without retail mark-up, markdown or
commissions and may not represent actual transactions.

(b) Holders of Record

As of March 31, 2000 there were 124 holders of record of the Company's Common
Stock. As of March 31, 2000 there were approximately 300 beneficial owners of
the Company's Common Stock who held such stock in the "street" name of various
brokers and dealers.

(c) Dividends

The Company declared no dividends during 1999. The Company currently does not
have any restrictions that limit its ability to pay dividends on its Common
Stock or that are likely to do so in the foreseeable future.

(d) Recent Sales of Unregistered Securities

During the period from December 13, 1999 through April 10, 2000 we sold an
aggregate of 1,899,664 shares of restricted common stock for aggregate proceeds
of $6,508,050 to accredited investors at prices ranging from $2.11 to $5.80 per
share. In connection with these sales, we issued warrants exercisable into an
aggregate of 2,981,266 shares of our common stock at exercise prices ranging
from $2.11 to $18.00 per share. 500,000 of these warrants are exercisable at
$14.875 per share until August 2000. 2,000,000 of these warrants are exercisable
at $18.00 until April 2, 2003 and callable by the Company upon the effectiveness
of a registration statement registering the shares underlying the warrants at
93% of the then average price of the common stock over a five day period
following the call and redeemable by the Company at $.75 per share decreasing to
$.50 in June 2000 and thereafter by $.05 per month until a minimum of redemption
price $.25 per share. 481,266 of these warrants are exercisable at prices
ranging from $2.11 to $.4375 for different three-year periods that expire
between December 2002 through April 2003.

We made the private placement offerings and sales under Section 4(2) and
Regulation S of the Securities Act of 1933, as amended (the "Securities Act").
The terms of the offerings provided for issuance of restricted common stock at a
purchase price equal to a percentage discount from the market valuation of our
publicly traded common stock. Sales made in December 1999, January 2000,
February 2000 and April 2000 were made at a 35%, 25%, 20% and 10% percentage
discount from the market valuation of  our common stock, during such respective
periods. The restricted shares of common stock and the shares of common stock to
be issued upon exercise of the warrant may

                                       21
<PAGE>

be offered for public resale only if registered under the Securities Act of 1933
or an exemption therefrom. We have agreed to provide the purchasers with certain
registration rights with respect to the restricted common stock and the common
stock underlying the warrants.

In April 2000 we issued 297,672 restricted shares of our common stock to an
unaffiliated shareholder who converted a $150,000 loan made to VCI in January
1999 pursuant to the loan agreement between the lender and VCI.

Since the merger with VCI in October 1999 and through March 31, 2000, we have
granted an aggregate of 1,318,500 options to purchase our common stock to our
officers, directors and employees under our 1999 Stock Option Plan approved by
shareholders of the Company in October 1999. The exercise price of these options
were  equal to the fair market value of the Common Stock on the date of their
respective grants ranging from $3.00 to $7.80. All of these option grants were
made under the exemption from the registration requirements of Rule 701 of the
Securities Act of 1933. In April 2000, we intend to file a Form S-8 Registration
Statement with the Commission registering the shares underlying the options
granted under the 1999 Incentive Stock Option Plan and 2,413,781 additional
shares underlying VCI's 1997, 1998 and 1999 Plans (see Item 11. Executive
Compensation - Stock Option Plans).

The Company's sales of unregistered restricted securities in reliance on Section
4(2) were made on the basis of the following: (i) the offerings of restricted
securities were not made publicly, (ii) the offerings were made to a very small
group of sophisticated and accredited investors, (iii) the investors were
provided with access to detailed Company information of the type found in a
Securities Act registration statement, (iv) most of the investors had a previous
relationship with the Company in the capacity as investors providing them with
special knowledge of the Company's development and background, (v) the size of
the units offered were limited with respect to comparable amounts of outstanding
Company securities; (vi) the offerings were conducted solely on a private basis
without distribution of any materials or announcements to the public, (vii) and
each of the investors represented and warranted that they were purchasing the
restricted securities with investment intent and not with a view to sell or
distribution.

The Company's sales of unregistered restricted securities under Regulation S,
were made by the Company in compliance with the rules and regulations
thereunder, including, without limitation, reliance upon the representations and
warranties of the purchasers thereof that they were not "U.S. Persons", as such
term is defined in Regulation S.

In December 1996, the company issued 20 units, each unit consisting of a note
in the principal amount of $50,000 bearing interest at 10% per annum and
warrants to purchase 25,000 shares of common stock at an exercise price of $3.00
per share to accredited investors for an aggregate purchase price of $1,000,000.
The units were issued pursuant to an exemption from registration provided by
Regulation D promulgated under Section 4(2) of the Securities Act. D.H. Blair
Investment Banking Corp. acted as the Registrant's placement agent in connection
with this private placement. In connection therewith, the registrant paid sales
commissions in the aggregate amount of $100,000 and a non- accountable expense
allowance in the aggregate amount of $30,000.

In October 1999, the Company issued a three year warrant exercisable into
160,206 shares of restricted Common Stock at an exercise price of $2.10 per
share to Jesup & Lamont Capital Markets, Inc. as partial consideration for
services rendered by it to the Company in connection with the Company's merger
with HDG.  The warrant was issued under Section 4(2) of the Securities Act on
the basis that the investor was a highly sophisticated accredited investor, the
offering of such warrant was not public and the investor had access to such
Company information as would be available in a Securities Act Registration
Statement.

Escrowed Shares and Options

In connection with the Company's initial public offering in February, 1997, the
holders of 349,370 shares of the Company's common stock (the "Escrow Shares")
and options to purchase 50,630 shares of the Company's Common Stock (the "Escrow
Options") placed their Escrow Shares and Escrow Options into escrow pursuant to
an escrow agreement with American Stock Transfer & Trust Company, as escrow
agent. As a condition to, and upon the consummation of the merger with VCI in
October 1999, the Escrow Shares and Escrow Options were converted into 400,000
warrants of the Company exercisable until October 28,2002. 349,370 of these
warrants are exercisable at $1.85 per share and 50,630 warrants are exercisable
at $2.31 per share.

                                       22
<PAGE>

ITEM 6

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
Company's consolidated financial statements and related notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The statement of operations data presented below for the years
ended December 31, 1999 and 1998, and the balance sheet data at December 31,
1999 presented below, are derived from the Company's financial statements
audited by Arthur Andersen LLP, independent certified public accountants.
Historical results are not necessarily indicative of the results of operations
to be expected in the future.


<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                            -----------------------------------------
                                                   1999                        1998
                                                   ----                        ----
Statement of Operations Data:
<S>                                           <C>                          <C>
Revenue                                       $       857                  $      819
Operating costs and expenses
   Cost of Revenues                           $     1,816                  $      721
   Selling and marketing expenses             $     1,583                  $      469
   General and administrative                 $     2,222                  $      872
    expenses
   Merger Costs                               $     1,057                         -
   Total operating expenses                   $     6,578                  $    2,062
Operating Loss                                $    (5,821)                 $   (1,243)
Financing expenses, net                       $       109                  $      191
Net loss                                      $    (5,930)                 $   (1,434)
                                              ===========                  ==========

Net loss per share, basic and diluted              $(0.56)                     $(0.17)

Weighted average number of shares
 outstanding basic and diluted                 10,523,530                   8,485,904

<CAPTION>

                                       December 31, 1999
                                     --------------------
Balance Sheet Data:
<S>                                           <C>
Cash and cash equivalents                     $       469
Working deficit                               $    (1,604)
Total assets                                  $     2,364
Total liabilities                             $     2,888
Shareholders' deficit                         $      (524)
</TABLE>

                                       23
<PAGE>

ITEM 7

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

     The following description of our financial condition and results of
operations should be read in conjunction with the information included in this
prospectus. The description contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ significantly from the
results discussed in the forward-looking statements as a result of the risk
factors set forth above and elsewhere in this prospectus.

Overview

     Virtual Communities, Inc. (the "Company") is a developer and publisher of
online business-to-business and business-to-consumer communities. Through its
proprietary Community Management Solution(TM) (CMS), the Company designs and
develops web-based vertical communities containing a comprehensive suite of
products and services that includes web publishing and content management
software, integrated e-commerce solutions and best-of-breed interactive
community features. The Company also provides its CMS clients with editorial and
marketing services. CMS provides a rapid, 90-day, one-stop solution for creating
an online community that contains all the web tools required for managing
content, conducting e-commerce and attracting and retaining online visitors.

     The Company, a Delaware corporation formerly known as Heuristic Development
Group, Inc. ("HDG"), consummated a merger (the "Merger") with Virtual
Communities, Inc. ("VCI"), also a Delaware corporation, in October 1999. Prior
to the Merger, we were a development stage company organized to develop, design
and market fitness-related products. In 1999, we decided to pursue a strategy of
acquisition of an existing company culminating in the merger with VCI. VCI was
organized in 1996 to develop and operate online communities on the Web targeted
to specific ethnic groups. After the Merger, we changed our name to Virtual
Communities, Inc., to reflect that our Company's business is now the development
and operation of online communities and related services for third parties and
the publishing of our own online communities. In March 2000, we merged this
wholly owned subsidiary into the parent company.

     VCI was incorporated in August 1996 as Virtual Jerusalem Ltd., Inc. It was
founded to develop, acquire and operate online communities on the Web targeted
to members of demographic groups with interests in their historical ethnic
backgrounds and who want to share information with other members with like
interests. In June 1997, VCI acquired substantially all of the assets and
outstanding shares of Virtual Communities Israel Ltd. formerly called Virtual
Jerusalem Ltd. ("VCIL"), an Israeli corporation formed in 1996 by the founders
of VCI that developed and published an Internet Web site called Virtual
Jerusalem. VCIL currently develops and maintains the Company's online
communities and performs certain programming, design, software development and
web maintenance services on behalf of the Company pursuant to a Cost Plus
Agreement and certain general and administrative duties on behalf of the Company
pursuant to a Financial Services Agreement between the entities.

     We currently operate five online communities: Virtual Jerusalem
(www.virtualjerusalem.com), Virtual HolyLand (www.virtualholyland.com), Virtual
Ireland (www.virtualireland.com), Virtual Italy (www.virtualitaly.com) and
Virtual India(www.virtualindia.com). Rather than create our own content, we
aggregate content, including news and features, from our content partner Web
sites. In consideration for our use of their content, we offer our content
partners a variety of benefits such as a portion of advertising revenues, links
back to their sites, interactive elements, We supplement the content on our Web
communities by adding a variety of interactive and community-enhancing elements,
such as free e-mail, weather, bulletin boards and chat services. We obtain the
rights to use these elements or "modules" by licensing the technologies from
Internet service providers. Our communities are presented in an easy to use
channel format and are designed to create a cohesive and comprehensive Web
environment targeted to specific demographic profiles. Based on our expertise in
designing and developing Web sites for our content partners, we also recently
began offering Community Management Solution (CMS) Web site design and
development services to others on a fee for services basis. Our first online
community, Virtual Jerusalem, was launched in May 1996 by VCIL. Virtual
Jerusalem contains content from many Jewish and Israel-related news providers
and content partners. In addition, Virtual Jerusalem contains many interactive
elements designed to encourage users to return to the site on a regular basis,
including an online radio station, and a search engine with access to over
10,000 other Jewish related Web sites.

     In December 1998, we launched our second online community, Virtual
HolyLand, which is targeted to Evangelical Christians, and in March 1999, we
launched our  third online community, Virtual Ireland, which is targeted to
people of Irish descent. In October 1999, we launched Virtual Italy targeted to
the Italian American community. In November 1999, we launched Virtual India
targeted to the Indian American community.

     To date, we have entered into four agreements for the sale of CMS. Such
agreements call for the design and development of an online community within a
90 day period in consideration for a fee payable over the 90 day period.



                                       24
<PAGE>

     Advertising is offered to our advertisers at rates that are based upon an
industry accepted CPM (cost per thousand page views delivered) basis. Discounts
from our standard advertising rates are offered to certain advertisers based on
several factors, including the duration and gross dollar amount of advertising
campaigns. We currently sell banner ads for six to twelve month periods,
although in many instances such contracts are cancelable by an advertiser after
a three-month period. Cancellations by advertisers have been negligible. Barter
advertising accounted for approximately 28% and 27% of our advertising revenues
for the fiscal years ended December 31, 1998 and 1999, respectively. Revenue
from barter transactions is calculated based upon the fair market value of the
goods or services received.

     We project increased revenues from banner advertising sales as we continue
to expand our advertising sales staff, and solicit advertisers which seek the
types of Web sites developed by us since such sites deliver an audience
comprised of a specific demographic profile to which such advertisers can tailor
a targeted campaign.

     We are also introducing e-commerce programs on our communities powered by
Intershop Software, and introducing similar programs for our other online
communities. We will charge a fee of $175 to $500 for each store placed on one
of our Communities and receive a percentage of gross sales equal to 10%. We
provide links to these third party Web sites for which we receive a percentage
of sales from users who make purchases on those third party sites where such
users originated from our sites. We expect e-commerce transactions to generate a
significant percentage of our revenues in the future. To the extent that the
number of anticipated users on our online communities is less than anticipated,
that such users do not engage in e-commerce transactions or that we do not
establish attractive e-commerce programs on our communities, revenues generated
from e-commerce will be less than projected.

     We believe that the continued expansion of our operations and marketing
efforts is essential to achieving our financial goals. We therefore intend to
continue to substantially increase expenditures in all areas of our operations,
resulting in continued increases in cost of revenues and selling, general and
administrative expenses. To the extent that such expenses precede or are not
subsequently followed by increased revenues, our business, financial condition
and operating results will be materially adversely affected.


Historical Comparison of Years Ended December 31, 1999 and 1998


Revenue


     Total Revenues. Total revenues for fiscal years ended December 31, 1998 and
December 31,1999 were $819,000 and $857,000, respectively. Revenue to date has
almost exclusively been generated by VCI's own online communities, specifically
Virtual Jerusalem. In the third quarter of 1999, the from CMS Services commenced
and is expected to outpace our communities revenues by the end of the first
quarter 2000.

     CMS Services Revenues. CMS Services revenues commenced in the third quarter
of 1999, and amounted to $165,000, or 19%, of total revenue for the fiscal year
ended December 31, 1999. This revenue was generated in its entirety from one CMS
Customer. Management anticipates that this revenue stream will quickly pick up
momentum and will become our primary source of income by the end of the first
quarter 2000. To date, VCI has entered into four CMS agreements. If VCI fails to
attract new customers, VCI's business, financial condition and operating results
may be materially adversely affected.

     CMS services is considered, for accounting purposes, software products and
technology, and therefore, revenue therefrom is recognized in accordance with
Statement of Position (SOP) 97-2, as amended by SOP 98-4 and SOP 98-9.
Therefore, revenue is recognized upon delivery, when collection is probable, the
fee is fixed and determinable, vendor-specific objective evidence exists to
allocate the total fee to the elements of the arrangement and persuasive
evidence of an arrangement exists. Revenue for maintenance and support services
are deferred and recognized ratably over the service period.

      Online Communities Revenues.  As of end of 1999, our primary source of
total revenue to date derived from banner advertising fees.  Revenues from
banner advertising accounted for approximately $511,000, or 62% of revenue, and
$418,000, or 49% of total revenue for fiscal years ended December 31, 1998 and
1999, respectively.  The decrease of approximately 18% primarily resulted from
the lag time between the completion of the advertising contract with our prior
travel sponsor, Tower Air in December  1998, and the commencement of the
contract with the new travel sponsor, Continental Airlines in May 1999.
Banner advertising is expected to rise steadily due to an increased sales staff
and marketing efforts.  In addition, 30% of the advertising contracts are now
for a duration of twelve months, as compared with 4% in 1998.  To date, we have
signed banner advertising contracts for revenues recognizable in the year 2000
approximating $382,000.


Of the total banner advertising revenue earned, barter advertising accounted for
28% and 27% of such revenues for fiscal years ended December 31, 1998 and 1999,
respectively.  Revenue from barter transactions is calculated based upon the
fair market value of the goods or services received.


  To date, we have not derived significant revenue from e-commerce commissions.
E-commerce commission revenues accounted for 5% and 4% of total revenues for
both 1998 and 1999 fiscal years, respectively. We expect e-commerce transactions
to generate
                                       25
<PAGE>

an increasing percentage of our revenues in the future as e-commerce partners
are added to our online communities. In December 1999 we signed a contract with
Intershop, Inc., provider of E- Commerce technologies. We expect our e-commerce
revenue to increase materially upon implementation of Intershop e-commerce
technology with our communities.


  Additional site revenue streams are Web site hosting, Web links and promotion
of content partner Web sites on our online communities, and production services.
Hosting, Web link and promotion revenues are recognized ratably over the service
period pursuant to annual agreements that provide for annual fees. Production
revenue is recognized upon performance of production services. Hosting, Web link
and promotion revenues accounted for 21% both for 1998 and 1999 fiscal years.
Production revenues accounted for 12% and 6% for fiscal years ended December 31,
1998 and December 31, 1999 respectively. Management expects these revenue
streams to decrease as resources are refocused away from Web site hosting and
production.


     Significant Customers.   The five largest community advertising clients
accounted for over 47% of total revenue in 1999, with Continental Airlines
accounting for approximately 22% of such total revenue. The agreement with
Continental Airlines, executed in May 1999, is a barter advertising agreement
largely for airline tickets, equivalent in value to $150,000, in exchange for
advertising placements on the Virtual Jerusalem site for equivalent value. This
contract is currently being renewed at approximately the same value. Due to
shift of business to the CMS sector, Management does not believe that our
success will depend largely upon our ability to broaden and diversify our
advertising base. If we lose advertisers, fail to attract new advertisers or are
forced to reduce advertising rates in order to retain or attract advertising
clients, our business, financial condition and operating results would not be
materially adversely affected.


     Revenue Mix.  In 1999 CMS revenue and Community generated revenue accounted
for 19% and 81%, respectively, of total revenue.  This revenue mix was
significantly impacted the fact that CMS was first launched in August 2000.  By
the end of the year 2000, the revenue mix is anticipated to be approximately 67%
CMS revenue, 27% advertising revenue, and 6% E-Commerce revenue.


Cost of Revenue

     Cost of revenue consists primarily of expenditures for technical support of
our online communities, Internet access and connectivity, Web site production,
content development and maintenance and client services. Cost of revenue
amounted to $721,000, or 88% of revenue, in 1998 and $1,816,000, or 212% of
revenue, in 1999. This increase is primarily due to the increased hiring of
additional technical and Web development and design personnel in 1999, and the
increased overhead and support services necessary to support expanded
operations. The increase in technical personal is critical to the development,
implementation and support of the CMS services and core technology. In addition,
the increase is attributed to the commencement of a licensing fee in 1999 for
software used as components of CMS.


Sales and Marketing

     Selling and marketing expenses consist of salaries, travel expenses for
sales staff, sales commissions, advertising revenue sharing with content
partners, marketing expenses for our online communities and commencing in the
fourth quarter 1999, CMS and marketing materials and promotions. Sales and
marketing amounted to $469,000, or 57% of revenue, in 1998 and $1,583,000, or
185% of revenue, in 1999. The salary expense increased by 151% over 1998 as we
hired additional sales and marketing personnel and, in addition, dedicated a
resource to administer our advertisement management program. In the fourth
quarter 1999 we ran a marketing campaign to launch our CMS services, and at the
same time, began to market aggressively our online communities in order to
increase the numbers of users and encourage their registration on our
communities.


General and Administrative

     General and administrative expenses consist primarily of salaries and legal
and professional services. In addition, our rent, utilities and administrative
employee benefits are included in general and administrative expenses. General
and administrative expenses amounted to $872,000, or 106% of revenue, in 1998
and $2,222,000, or 259% in 1999. This increase was primarily due to the increase
in hiring of additional personnel, and the increase in overhead and support
services necessary to support expanded operations. Additionally, legal fees
increased materially for work related to special projects, new contract
formation, and subsidiary acquisition which occurred subsequently in February
2000.


Merger Costs

     Cost related to our Merger amounted to $1,057,000. Of this amount 44%
represents compensation to the broker, in the form of an 8% cash fee on our
closing cash value and non cash compensation in the form of warrants issue at
merger closing.  The value of the non cash compensation cost was determined
using Black-Scholes pricing model.


                                       26
<PAGE>

     Financing Expenses amounted to $191,000 and $109,000 for fiscal years ended
December 31, 1998 and 1999, respectively.  Financing expenses relate to interest
incurred in the ordinary course of business and from costs associated with
shares issues at a discount price or in consideration of a loan.


Provision for Income Taxes

     At December 31, 1999, we had approximately $7,000,000 million in federal
net operating loss carryforwards. The federal net operating loss carryforwards
will expire between calendar years 2012 and 2019 if not utilized. In addition,
the Tax Reform Act of 1986 contains provisions that may limit the net operating
loss carryforwards available for use in any given period upon the occurrence of
various events, including a significant change in ownership interests. To date,
we have not utilized any portion of our net operating loss carryforwards to
reduce our overall income tax liability.


Liquidity and Capital Resources

     Prior to 1999, we funded our operations, working capital needs and capital
expenditures primarily through private placements of our common stock, and the
issuance of short-term convertible loans and notes.

     In February 1999, we received $815,000 in net proceeds from the sale of
9,550 shares of our series A preferred stock. At the same time we issued 5,000
shares of our series A preferred stock upon the conversion of a $500,000
convertible secured promissory note issued by us on December 31, 1998.
Between June and September 1999, we received net proceeds of $874,000 from the
sale of 10,325 shares of our series B preferred stock.

     On December 14, 1999, we received a total of $985,400 for the private
placement sale to accredited investors of 400,000 shares of restricted common
stock and a three-year warrant, exercisable for 40,000 shares of common stock at
a purchase price of $2.46 per share. We made the private placement offering
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"). The terms of the offering provided for issuance of the restricted common
stock at a purchase price equal to 35% below the market valuation of our
publicly traded common stock and the issuance of a warrant exercisable for the
purchase of one share of common stock for each ten shares purchased. The
warrants become exercisable six months after the date of issuance. The
restricted shares of common stock and the shares of common stock to be issued
upon exercise of the warrant may be offered for public resale only if registered
under the Securities Act of 1933 or an exemption therefrom. We have agreed to
provide the purchasers with certain registration rights with respect to the
restricted common stock and the common stock underlying the warrants. Such
registration rights commence six months from the date of purchase and if the
registration is declared effective by the Securities and Exchange Commission,
public resale of such securities shall be permitted. We paid approximately
$50,000 and issued warrants exercisable for 120,000 shares of common stock on
the same terms and conditions as the warrants issued in the private placement as
financial advisory consultant fees related to the closing of the first tranche
of the private placement offering.  The terms and conditions of the private
placement offering were duly authorized by our Board of Directors as being
reasonable and in the best interests of the Company, with particular regard to
our need for operating capital and the limited availability of other reasonable
financing alternatives at the time.

     In January and February 2000, the Company issued 981,864 shares of common
stock at prices per share ranging from $2.11 to $3.42 to 12 individuals and
entities, including three non-U.S. shareholders of the Company, for aggregate
gross proceeds of $2,524,000.  In connection with the issuance of 468,098 of
such shares to three existing shareholders of the Company, the Company issued
three-year warrants to acquire a total of 46,808 shares of common stock at
exercise prices ranging from $2.11 to $2.75.  The Company paid consultant and
finders fees related to the January and February financing in the form of three-
year warrants exercisable into 108,762 shares of common stock at exercise prices
ranging between $2.11 and $3.42 per share.

     In April 2000, the Company sold 517,800 of its shares at $5.80 per share to
four institutional investors in a private placement arranged by Josephthal &
Company and Intercoastal Financial Services Corp.  In connection with the sale,
the Company issued 2,000,000 callable warrants to Intercoastal (the "IFSC
Warrants") exercisable for a period of three years at an exercise price of
$18.00 per share.  1,000,000 of these IFSC Warrants are callable by the Company
at 93% of the average price of the Common Stock for the five days immediately
following the call which may be made by the Company following the effectiveness
of a registration statement registering the shares underlying the IFSC Warrants.
The remaining 1,000,000 IFSC Warrants are callable by the Company three months
following the date of effectiveness of such registration statement.  The IFSC
Warrants are redeemable by the Company at $0.75 per share decreasing to $0.50 in
July 2000 and thereafter by $0.05 per month until such redemption price reaches
$0.25 per share.  In connection with the private placement, the Company issued
a) 500,000 four-month warrants to the purchasers of the shares exercisable at
$14.875 per share, b) 129,450 three-year warrants to such purchasers exercisable
at $7.4375 per share which are also redeemable at the same price as the IFSC
Warrants and c) 36,246 warrants exercisable for three years at $5.80 per share
to Josephthal & Company, the company's investment banker in connection with the
transaction in partial consideration for its introduction of IFSC to the
Company.

     We maintain an operating line of credit with Israel General Bank in the
amount of $560,000. As of  March 31, 2000, the amount outstanding on this line
of credit totaled $515,000. Israel General Bank has also provided us with a
$58,000 guarantee for three months rent on the leaseholds occupied by Virtual

                                       27
<PAGE>

Communities Israel, Ltd.

     In June 1999, Virtual Communities Israel, Ltd., ("VCIL"), one of our
Israeli subsidiaries, entered into a three-year lease for approximately 10,000
square feet of office space in Jerusalem for approximately $45,000 in quarterly
leasehold costs which payments commenced in December 1999. In January and March
2000, VCIL exercised options for additional space which serves primarily as the
Company's software development, programming and communities design center. Total
leasehold costs for the new space will equal to approximately $165,000 per year.
In July 1999, we entered into a five-year lease for approximately 5,000 square
feet of office space in New York City for a rental fee of approximately $22,500
per quarter. In October 1999, we exercised our option to lease an additional
5,000 square feet of office space in the same building for a five-year time at a
monthly rental of approximately $8,250. In addition, the lessor of the new
Jerusalem premises is contributing $234,000 in buildout costs that VCIL is
obligated to repay over the course of the lease term. In January 1999, VCIL
entered into a three-year lease for approximately 3,800 square feet of office
space in Jerusalem which it vacated upon our move to new premises in August 1999
and which it intends to sublet upon vacancy of the current sub-lessor in July
2000. Although VCIL believes that it will be able to continue to sublet such
space, our management cannot assure you that it will be successful in doing so,
and in the event such space cannot be sublet, we would be obligated to pay
approximately $15,000 in quarterly leasehold fees in addition to the lease costs
for our new premises until December 2001.

     We anticipate that we will continue to increase our capital expenditures in
the near future due to anticipated growth in our operations, infrastructure, and
personnel. In addition to the commitments relating to the new leaseholds,
improvements to infrastructure, additional licenses for interactive elements
(including content management software) and Web site security are expected to
amount to approximately $115,000 monthly through the year 2000.

     Projects anticipated during the year 2000 which will require capital
expenditure of approximately $500,000 includes the development of server parks
in New York and London in order to facilitate local technical services for CMS
customers and the opening of an office in California.

     In March 2000, the Company entered into a finance lease agreement with
Microtech Leasing Corp., a Princeton, New Jersey company for the lease of up to
$250,000 of computer equipment to the Company.  The credit facility provides the
Company with the ability to obtain certain computer equipment financed by the
lease which is secured by such equipment.

     Marketing expenditures are expected to approach approximately $50,000 per
month to promote CMS services and, on average, $73,000 per month per each of our
Web sites, by the fourth quarter of 2000, in order to reach projected levels of
CMS customers, registered users, traffic, and revenue from banner advertisements
and e-commerce transactions on online communities.

     We anticipate that our existing cash balance combined with the net proceeds
which may be realized from the sale of additional shares pursuant to our private
placement offerings, the anticipated proceeds from exercise of warrants and
anticipated revenue from operations will be sufficient to meet our working
capital and capital expenditure needs through December 31, 2000. If the cash
that we generate from our operations is insufficient to satisfy our liquidity
requirements after this period, then we may need to sell additional securities.
The sale of additional equity or convertible debt securities may result in
additional dilution to our shareholders. We will need to obtain additional
capital or modify our growth strategy. We may not be able to raise any
additional capital or obtain such capital on acceptable terms.

Legal Proceedings

     Certain shareholders, who held some of VCI Series B Preferred Stock prior
to the Merger, have notified the Company that they believe that they are
entitled to additional shares Common Stock and that they intend to commence an
action in connection with such claims. They contend that the reset price for the
conversion of the former Series B Preferred shares to the Common Stock of the
Company pursuant to the Merger agreement should have been $1.45 rather than the
$2.10 used by the Company. While the holders thereof have not filed a suit to
date, their claim amounts to approximately 170,000 additional shares of Common
Stock of the Company. The Company and its counsel believe that their claim is
without merit. The Company intends to defend vigorously any action which may be
filed against the Company and its officers and directors in connection with the
aforementioned claim.

                                      28
<PAGE>

RISK FACTORS

In addition to the other information in this report, the following factors
should be carefully considered in evaluating our business and prospects.


                  We face risks associated with our operations

   Virtual Communities, Inc. was founded in August 1996. We have a limited
operating history and cannot predict the viability of our online community
design, development and maintenance business and our own published communities
business.

   We have a history of losses and expect to incur losses in the future, and we
may never achieve profitability.

     For the years ended December 31, 1998 and 1999, VCI incurred net losses of
$1,434 and $5,930, respectively, and had an accumulated deficit of $8,856,000 as
of December 31, 1999. To date, neither VCI nor Heuristic Development Group,
Inc., our predecessor company, has been profitable on either a quarterly or on
annual basis, and we expect to incur net losses in the future. We expect our
operating expenses to increase significantly, especially in the areas of CMS
sales and marketing, the expansion of our CMS design and development and
maintenance business, and, as a result, we will need to increase our revenue
substantially to become profitable. If our revenue does not grow as expected or
increases in our expenses are not in line with our forecasts, we will continue
to incur net losses.

Our operating results depend on revenues from CMS clients and advertising
revenues that could be affected by cancellation of key contracts and decreases
in Web site traffic.

     Although CMS sales represented 0% and 19% of VCI's revenues for the years
ended December 31, 1998 and 1999, respectively, we anticipate that a majority of
our revenues will derive from CMS sales in the year 2000 and beyond. These
revenues, if and when received by the Company, will derive from a limited number
of customers, who could have a significant impact on revenues in the event they
were to cancel one or more of such CMS agreements. The Company has entered into
four CMS agreements to date all of which agreements contain cancellation clauses
in the event of a fundamental breach by the Company in the performance of its
obligations thereunder.

     The Company typically accepts equity in lieu of cash payment from clients,
up to approximately 50% of the amount we charge.  Typically, that equity has
represented less than 5% of the equity of the CMS client. In most instances this
equity is in the form of privately held restricted securities subject to lock-up
provisions and as a result these shares are not immediately saleable by the
Company for the immediate future. While the Company believes that the equity it
receives in a CMS client will eventually be profitable, we cannot assure you
that this will be the case. Even when the shares received by the Company are
available for resale, there may be no market for such shares enabling the
Company to sell and realize a gain from them.

     Taking equity in our CMS clients will also result in less working capital
for the Company. We cannot assure you that the web businesses in which the
Company will have  a portion of equity will ever be profitable or that the
shares in such clients will have value at such time when the Company's lock-up
restrictions expire.

     In some instances the Company's ability to retain the equity issued to it
from its CMS clients is dependent upon the Company's maintenance of such
clients' online communities pursuant to maintenance agreements entered into with
them. While maintenance fees represents an additional form of revenue for the
Company, in some instances it will  expose the Company to additional risks in
the event we do not provide the services as agreed. These risks include the need
to arrange other hosting services for CMS clients in the event the Company
cannot provide such services and/or obtain licenses from third party service
providers at the Company's cost, to operate portions of client web sites.

                                       29
<PAGE>

     Historically, VCI has derived a material portion of its revenue from the
sale of advertisements on its online communities. For the years ended December
31, 1998 and 1999, advertising revenue represented 62% and 49% of our total
revenue, respectively. A majority of our advertising revenue will come from
advertising contracts that are usually six to twelve months in length and are
often cancelable upon three months notice. That means our quarterly revenue is a
function of the contracts we will attract and/or retain within the quarter and
our ability to adjust spending in light of any revenue shortfalls. To date, the
advertising revenue from our Web sites comes from a small group of customers
whose composition periodically changes. For example, during the year ended
December 31, 1998 and 1999, the five largest advertisers accounted for
approximately 51% and 47% of total advertising revenue, respectively. As a
result, the cancellation of even a small number of these advertising contracts
could affect our operating results.

     Advertising revenue is also linked to the level of traffic on our online
communities, so if traffic is less than the level expected by our advertising
customers, our advertising revenue could be adversely affected. Under most
advertising contracts, we guarantee our advertisers a minimum number of
impressions on our Online communities. Reduced traffic on these online
communities would cause us to fall short in meeting this minimum requirement
and, as a result, we may be required to extend the length of time that an
advertiser may advertise on our online communities without a concurrent increase
in advertising revenue. This kind of extension would reduce the availability of
space for other advertisers, which would lead to a reduction in advertising
revenue.

     It is uncertain whether Web advertising will continue to grow at a rate
that will support our revenue projections. The Internet as a marketing and
advertising medium has not been available for a sufficient period of time to
gauge our effectiveness as compared with traditional media. Many of our
advertisers have only limited experience with the Web as a sales and advertising
medium. In general, advertisers have not yet devoted a significant portion of
their advertising budgets to Web based advertising and may not find such
advertising to be effective for promoting their products and services relative
to traditional print and broadcast media. For 1998, a report by Jupiter
Communications states that advertising on the Web represented less than 5% of
overall advertising revenue in the United States according to industry sources.

     You should consider the risks and difficulties frequently encountered by
companies like us, an early stage company involved in Web site design and
development and operating online communities. These risks include, without
limitation, risk that we may not be able to attract or retain Web design and
development clients; the risk that we may not be able to integrate our own
technology and know-how with licensed technology in both the development and
maintenance of our clients' and our own communities; and the risk that we may
not anticipate and adapt to a developing demographic market or the Internet
industry, the level of use and consumer acceptance of the online community
model, and thus our ability to attract users and registrants and the risk that
we may not be able to continue to develop and operate future communities.

If our CMS and advertising revenues fall below the expectations of securities
analysts and investors, the market price of our shares will likely decline.

     If our capital is insufficient to promote our business and we cannot obtain
needed financing, we will not be able to promote our CMS business and online
communities, exploit opportunities and remain competitive.

   Since our current revenues are insufficient to pay for our current operating
expenses, following the merger, we will depend on additional investments to fund
our existing and future operations as well as to execute our acquisition and
business plans, and expand our marketing and sales efforts. We believe that our
available cash is sufficient to support our current operations through June
2000, and therefore we need to raise additional funds to maintain and develop
our position in the marketplace. We anticipate that we will be able to raise
additional funds by calling 2,000,000 warrants issued by us in April 2000 in
connection with a private placement of securities. However, our ability to call
these warrants depends upon our obtaining an effective registration statement
filed with the Commission registering the shares underlying such warrants. In
addition, our agreement with the warrant holder provides that we may only call
1,000,000 warrants immediately upon the effectiveness of such registration
statement and the remaining 1,000,000 warrants three months following the date
of effectiveness and there is no certainty that the holder thereof will exercise
the warrants if we call them. The amount of funds which we may receive from such
call will depend upon the price of the shares of our common stock at the time of
our call.

     It may be difficult or impossible for us to obtain additional financing on
favorable terms. Raising funds by issuing equity securities or convertible debt
securities will dilute the percentage ownership of our current stockholders.
Also, if we

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<PAGE>

issue new securities they may have rights senior to the rights of our common
stock. If we cannot obtain needed financing, we will be unable to execute our
business plans and may be forced to liquidate our assets or file for bankruptcy.

Our independent auditors have expressed doubt over our ability to continue as a
going concern.

     The report of independent public accountants on our December 31, 1999
consolidated financial statements includes an explanatory paragraph stating that
the recurring losses incurred from operations and a net capital deficiency raise
substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

We face increasing competition and competitors with longer operating histories
for our online community design and development services.

     We recently started offering third parties, other than our content
partners, Web site design and development services that focus on creating online
communities and Web site content management. The market for these services is
relatively new, intensely competitive and subject to rapid technological change.
We expect competition not only to persist, but also to increase. Increased
competition may result in price reductions, reduced margins and loss of market
share. Our competitors fall into several categories, including Internet service
firms, technology consulting firms, technology integrators, strategic consulting
firms, and in-house information technology, marketing and design departments of
our potential clients. These competitors include Vignette Ltd., Interwoven, Inc.
and Openmarket, Inc.

     The barriers to entry for Web site design and development and programming
and development of content management systems are also relatively low, although
higher than less specialized areas of Web site design and development. As a
result, we expect to face additional competition from new market entrants in
these businesses in the future. Since the market for these services is rapidly
evolving, our competitors may be better positioned to service clients. We
compete on the basis of a number of factors, including the breadth and quality
of the services offered, creative design and systems engineering expertise,
pricing, technological innovation, and understanding clients' strategies and
needs. Many of these factors are beyond our control, therefore, existing or
future competitors may develop or offer services that provide significant
advantages over the services offered by us.

     Many of our competitors have longer operating histories in the Web market,
greater name recognition, larger customer bases and significantly greater
resources. In addition to current competitors, it is likely that additional
competitors will enter our markets in the future, and that many of these
competitors will have substantially greater resources than us. We cannot assure
you that we will be able to compete successfully in any of our current markets.

We have been substantially dependent on one online community for our revenues.

     While we currently operate five online communities (virtualjerusalem.com,
virtualholyland.com, virtualireland.com, virtualitaly.com and virtualindia.com)
and recently launched our CMS business, approximately 80% of our revenues for
1999 were generated directly or indirectly from virtualjerusalem.com. Although
we plan to market and further develop our other online communities, we cannot
assure you that we will successfully complete these plans, or if we complete
these plans, that these communities will generate significant revenues. Our
inability to complete these plans or generate substantial revenue from other
sources would have a material adverse effect on our ability to generate revenue.

     Our business model also relies on our plan to further develop our CMS
business for third parties and our ability to provide content management systems
and visitor retention elements for prospective clients. We have sold only four
such systems to date. Our inability to market and sell our community building
services could adversely affect our ability to increase revenues.

Changes in the political and economic stability of the State of Israel could
adversely affect our operations.

     One of our subsidiary companies, Virtual Communities Israel Ltd.("VCIL"),
which is integral to our success, is located in the State of Israel. In
addition, a significant number of our content partners and some of our
advertisers are based in Israel. Accordingly, we are directly influenced by the
political, economic and military conditions affecting Israel. Any military or
terrorist action or threat or other

                                       31
<PAGE>

significant hostilities involving Israel, the interruption or curtailment of
trade between Israel and our present trading partners or a significant downturn
in the economy or financial conditions in Israel could have a material adverse
effect on our ability to operate our business. Israel's economy has been subject
to numerous destabilizing factors, including a period of rampant inflation in
the early to mid-1980's, low foreign exchange reserves, fluctuations in world
commodity prices, military conflicts and civil unrest.

     In addition, since the establishment of the State of Israel in 1948,
significant hostilities exist, varying in degree and intensity, between Israel
and some Arab countries. Although Israel entered into various agreements with
some Arab countries and the Palestine Liberation Organization, and various
declarations were signed to resolve some of the economic and political problems
in the Middle East, we cannot predict if a full resolution of these problems
will be achieved, or the form of any resolution. Furthermore, all non-exempt
male adult permanent residents of Israel under the age of 50, including certain
of our employees, are obligated to perform military reserve duty and are subject
to being called into active duty under emergency circumstances. While we
operated despite these conditions in the past, we cannot predict the likelihood
of emergency circumstances occurring in the future or the impact of these
conditions on our operations in the future.

Our plans to operate online communities with international community content are
subject to risks that could adversely affect our ability to operate and expand
our online community business.

     Our online communities contain international community content, and our
plans to form strategic and joint venture relationships in other parts of the
world will increase our exposure to other risks and problems inherent in
international operations, including:

 . the impact of recessions in economies outside the United States;

 . greater difficulty in accounts receivable collections;

 . unexpected changes in regulatory requirements;

 . difficulties and costs of staffing, maintaining effective communications and
  managing foreign operations due to distance, language and cultural barriers or
  otherwise;

 . reduced protection for intellectual property rights;

 . political and economic instability;

 . the introduction of the Euro; and

 . fluctuations in currency exchange rates.

     Some or all of the above factors could have a material adverse effect on
our ability to expand our business by entering into agreements with entities
located in Ireland, Italy, India, Israel and other international markets. In
addition, even if our future plans are successful, we cannot be certain that our
investment in establishing relationships with entities in other countries will
produce the desired levels of revenue.

Any failure of our network infrastructure could adversely effect our operations.

     Our success depends upon the capacity, reliability and security of our
networking hardware and software infrastructure. We have developed a hardware
and software system that is designed for reliability, however, on isolated
occasions in the past the system has been subject to isolated failures due to
human error or software failure. The system integrates Web site management,
network monitoring, quality assurance, transaction processing and fulfillment
services. In addition, our CMS system, which is utilized on our online
communities and the communities of the CMS clients with whom we enter into
relationships, and our servers in the United States and Israel, emphasize
extensive automation and the back-up of our Web sites using various technologies
and a degree of redundancy. The system is designed to minimize single points of
failure.

     We are bulding our infrastructure so that it includes 500 gigabytes of disk
space which should support over 70 million Web page views per month. We are
continuing to expand and adapt our system infrastructure to keep pace with the
increase in the number of users and registrants who use the free Internet
services we provide. Demands on our infrastructure that exceed our

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<PAGE>

current forecasts could result in technical operating difficulties for our
online communities and the online communities of our CMS clients.

     Any system failure that interferes with the access to our online
communities or those of our CMS clients, and the use by users and registrants of
the Internet services that we and our CMS clients provide, could diminish the
level of traffic on our Web sites. Continuing or repeated system failures could
impair our reputation and brand name and reduce our e-commerce referral and
advertising revenue. At present, we do not know that we will be able to scale
our systems to handle a larger amount of traffic at higher transmission speeds.
Further, any expansion of our network infrastructure will require substantial
financial, operational and management resources, all of which could affect the
results of our operations by diverting these resources from other areas of our
business that we may seek to develop.

User access to, and the functionality of, our online communities are highly
dependent on third parties and are vulnerable to disruptions beyond our control.

     We use our own network servers that are housed at Frontier Global Services,
Inc.'s facilities in Herndon, Virginia and New York City, and at our facility in
Israel. Our online communities and those of our CMS clients are connected to the
Internet by Frontier Global Center in the United States and by Netvision Ltd. in
Israel via multiple DS-3, OC-3, and 128Kbs links on a continuous basis. Global
Center is responsible for ensuring that all of our servers have power and
connectivity to the Internet. We manage and monitor our servers and network
remotely from our facility in Israel and, in addition, Frontier Global monitors
our Web sites on a continuous basis.

     Although the agreements we have with Frontier Global  and Netvision provide
us with remedies for service interruptions, we cannot assure you that we will
have uninterrupted access to the Internet for our communities and the
communities of our CMS clients, or that our users and registrants will be able
to access them.

   We are currently in discussions with Frontier Global regarding certain
amounts charged by them for services provided to us. We believe that we will be
able to resolve such differences in a mutually satisfactory manner, and, in any
event, such differences are not material to our results of operations. However,
in the event we are unable to resolve such differences, we could experience a
disruption in the services provided to us by Frontier Global.

     A disruption for any reason in the Internet access provided to us by
Frontier Global or Netvision, any interruption in the service that Frontier
Global or Netvision receives from other providers, or any failure of Frontier
Global or Netvision to handle higher volumes of Internet users to our Web sites
could have a material adverse effect on our business, results of operations and
financial condition by reducing the level of traffic on our Web sites and cause
a breach in our agreements with our CMS clients.

   Despite precautions taken by us and by Frontier Global and Netvision, our
system is susceptible to natural and man-made disasters such as earthquakes,
fires, floods, power loss and sabotage.

     Our systems are also vulnerable to disruptions from human error, computer
Viruses and attempts by hackers to penetrate our network security. Hackers have
succeeded in penetrating our network security in the past, and we expect these
attempts to continue from time to time. Breaches of our network security could
also disrupt the operation of our Web sites and jeopardize the security of
confidential information stored in our servers. We have recently started
implementing "Firewall" network security in our Israel facility and at Frontier
Global's United States facilities. "Firewall" is an industry standard product,
manufactured by CheckPoint and installed for us by industry experts, that is
designed to prevent unauthorized entry into network security systems.

     Although we believe that Firewall will prevent unauthorized entry to our
network security in most instances, we cannot assure you that computer viruses
and hackers will not penetrate our systems in the future.

     Any of the events listed above could cause us interference, delays, or
service interruptions and adversely affect our business and results of
operations. Our success is dependent upon, among other things, our ability to
deliver uninterrupted Web site service to our CMS clients and the users and
registrants of our online communities and those of our CMS clients. As a result,
we must protect our computer equipment and the information stored in our servers
against damage by fire, natural disaster, power loss, telecommunications
failures, unauthorized intrusion and other catastrophic events.

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<PAGE>

     Web site services and other services based on software and computer systems
often encounter development and completion delays and the underlying software
may contain undetected errors or failures. In the case of Web sites, these
problems are heightened when the volume of traffic on a site increases. Such
delays and errors and other electronic or telecommunications failures are
generally beyond our control. In addition, we cannot assure you that errors will
not be found in the software underlying our content management systems or other
software that we license for use on our online communities or a community
developed by us for a third party. These errors might include bugs in the code
of standard "off the shelf" software product releases, and may result in delays
in the completion or launch of one of our own communities or a community or
other project that we develop on behalf of others. Other similar factors include
the timing of the commercial release of particular services or products and the
market acceptance thereof, unanticipated costs to cure any defect if it is
subject to cure, the need to refund money paid to us or to pay for damages
caused by the delay or defect.

     We depend on third party content partners and suppliers to attract users
and registrants to our Web sites and provide services and retention elements to
our CMS clients.

     The future success of our communities and those of our CMS clients depend
largely on our and their ability to attract and maintain a large base of users
and registrants because the larger our base the more likely commercial
enterprises are willing to advertise and sell their products and services on our
Web sites. Moreover, certain advertisers pay us based upon the number of times a
registrant views a particular advertisement. The volume of users who view our
communities and the size of our registrant base depends largely on the ability
of our current and future content partners, who supply content to our
communities and our ability to reach agreements with web service providers of
interactive elements which we and our CMS clients also use to attract and retain
users and registrants. While no single content partner or third party provider
of licenses is material to our operations, (with the exception of the Cortext
software in which we have a controlling interest in the licensor thereof) we may
not be able to maintain or expand our base of content partners and third party
providers of interactive elements. If we are unable to obtain content or
elements from them, we would reduce our ability to attract and maintain our
users and registrants and would likely lose significant advertising and other
revenue.

We rely on other companies to provide Internet services for our visitors,
registrants and CMS clients.

We rely on the following companies for the Internet services they provide to our
registrants:

 Company                                 Service
 -------                                 -------
Accuweather, Inc.                  Weather Service
Commtouch Inc.                     Free Email Service
deltathree.com Inc.                Internet Telephony
eCal Corporation                   Calendars
eShare Technologies Inc.           Chat and Forums
FairMarket, Inc.                   Auctions
homestead.com Incorporated         Free Home Pages
iMediation, Inc.                   Affiliate Software
Intershop Communications, Inc.     E-commerce Malls and Stores
iQ.COM Corporation                 Loyalty Solution
MatchNet.com (Jdate)               Dating Service
MBNA America Bank, N.A.            Affinity Credit Cards
otherproducts.com LLC (Meandaur)   Free Home Pages
Netgravity, Inc.                   Advertising Management Software
OANDA Corp.                        Currency Converter
OpenSite Technologies, Inc.        Auctions
Reuters Limited                    News Services and Photographs
Screaming Media-Net, Inc.          Content Provider
SmartAge Corp.                     Banner Exchange Programs
Talk City, Inc.                    Chat Services
Tribal Voice, Inc.                 Instant Messaging

     If our relationship with any of these companies were to terminate without
sufficient advance notice, and we were unable to establish relationships with
comparable service providers, our ability to provide Internet services to our
registrants, and to operate our own Web sites and to provide such services to
our CMS clients, would be adversely affected.

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<PAGE>

     The loss of Avi Moskowitz, our President and Chief Executive Officer,
Michael Harwayne, our Chief Operation Officer, Deborah Gaines, our Vice
President - Editorial Services, or other key personnel, or the inability to
attract and retain additional, qualified personnel in both the United States and
Israel, could adversely affect our ability to manage and grow our businesses.

     Our success depends to a significant degree upon the continued
contributions of our executive management team, most of whom have worked
together only for a short time. We do not carry key man life insurance on the
lives of any of our employees except for Avi Moskowitz, our Chairman of the
Board, Chief Executive Officer and President. Our success will also depend upon
the continued service of our management team as well as technical, marketing and
sales personnel, graphic artists and editorial staff. Although we have entered
into employment contracts with all the members of our management team, including
Mr. Moskowitz, all of our employees may voluntarily terminate their employment
at any time.

     Our success also depends upon our ability to attract, hire and retain
additional highly qualified management, technical, sales and marketing and
customer support personnel both in the United States and Israel. Locating
personnel with the combination of skills and attributes required to carry out
our strategy is often a lengthy process and competition for qualified employees
in the Internet industry, both in the United States and Israel, is intense. The
loss of key personnel, or the inability to attract, hire and retain additional,
qualified personnel, could have a material adverse effect on our ability to
manage and grow our businesses.

     Our operations could be adversely affected if our investments in our online
communities do not generate a corresponding increase in net revenue.

     As the number of Web sites grows, brand and site recognition will play an
increasingly important role. Establishing, developing and promoting our online
communities in the face of pressures from our competitors will be critical to
developing our registered user base, content and strategic partners and
commercial relationships. We will be required to continue to devote substantial
financial and other resources to maintaining the unique content of our online
communities through:

 . Web advertising and marketing;

 . traditional media advertising campaigns in print, radio and billboards; and

 . providing a high quality online community experience.

   The results of our operations could be adversely affected if our investment
of financial and other resources in developing and promoting our online
communities does not generate a corresponding increase in net revenue, or if the
expense of promoting our communities becomes excessive. Changes in the quality
and type of services we offer and our character as perceived by our registered
users could make our communities less attractive to our users, registrants,
advertisers, content and strategic partners, all of which would have a material
adverse effect on our ability to increase our registered user base and to
generate revenue.

An increasing portion of our business depends on the growing demand for Web site
design and development services.

     Because we are in the business of providing Web site design and development
services, our future success depends, in part, on the continued expansion of,
and reliance of consumers and businesses on, the Internet. The Internet may not
be able to support an increased number of users or an increase in the volume of
data transmissions. As a result, the performance or reliability of the Internet
may be adversely affected as use increases. The improvement of the Internet in
response to increased demand will require timely improvement of the high speed
modems and other communications equipment that form the Internet infrastructure.
The Internet has already experienced outages and delays as a result of damage to
portions of our infrastructure.

     The effectiveness of the Internet may also decline due to delays in the
development or adoption of new technical standards and protocols designed to
support increased levels of activity. We cannot assure you that the
infrastructure, products or services necessary to maintain and expand the
Internet will be developed, and without these developments, there will be
limited, if any, demand for our Web site design and development services.

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<PAGE>

Because competition in the online community business is intense, and many of our
competitors have greater resources than us, our ability to maintain or improve
our position in this market could be harmed.

  The market for community content aggregators on the Internet is new and
rapidly evolving. Competition for registrants, consumers, users and advertisers
is intense and is expected to increase over time. Barriers to entry are
relatively low. Other companies that are primarily focused on creating online
communities and with whom we compete are:

 . competitors to virtualjerusalem.com include: Jewish Communities On-Line
(located at America Online), Shamash (www.shamash.org; a non-profit Jewish
communal network), Jewish Family & Life (www.jewishfamily.com by JCN), and the
Jerusalem Post (www.jpost.co.il; the online edition of the newspaper);

 . competitors to virtualholyland.com include: crosswalk.com (published by Didax,
Inc.), Jesus2000.com, the Christian Broadcasting Network (www.wcbn.com), and
other Web sites published by ministries and evangelists worldwide;

 . competitors to virtualireland.com include: The Irish Times (www.ireland.com),
Local Ireland (www.local.ie; a quasi-governmental Web site financed in part by
Telecom Eireann), Ask Ireland (www.askireland.com); published by the government
of Ireland), Touchtel's tourist information site (www.goireland.com),
paddynet.com,     irishabroad.com and celtic.com;

 . competitors to virtualitaly.com include: DolceVita (www.dolcevita.com, a
fashion and travel site), Made in Italy (www.made-in-italy.com, a travel and e-
commerce site), and Virtual Italia (www.virtualitalia.com, a general Italian
interest site); and

 . competitors to virtualindia.com include: Rediff on the Net (www.rediff.com, an
India-oriented online service), India-Today (www.india-today.com, a news and
cultural site) and 123india.com (www.123india.com, a news information and
software site).

     We also face competition and compete for users and traffic with Web
directories, search engines, shareware archives, other content Web sites, online
service providers, and traditional media companies such as ABC, America Online,
CBS, CNET, Excite, Infoseek, Lycos, NBC, Microsoft, Time Warner and Yahoo!
Increased competition from these and other sources could require us to respond
to competitive pressures by establishing pricing, marketing and other programs,
or seeking out additional strategic alliances or acquisitions that may be less
favorable to us than we could otherwise establish or obtain.

     Substantially all of our current advertising customers and content partners
also have established collaborative relationships with some of our competitors
or other Web sites. Our advertising customers might also conclude that other
Internet businesses, such as search engines, commercial online services and Web
sites that offer professional editorial content, are more effective sites for
advertising. Moreover, we may be unable to maintain the traffic on our online
communities or sustain or increase the size of our registered user base, which
would make our communities less attractive than those of our competitors. Any of
these factors could adversely affect our ability to maintain or improve our
competitive position.


We could be liable for legal proceedings that would injure our business
reputation or result in substantial damages against us.

     Our failure or inability to meet a client's expectations in the performance
of Web site design and development services could injure either our or the
client's business reputation or result in a claim for substantial damages
regardless of our responsibility for such failure. In addition, the services we
provide to our clients may include access to confidential or proprietary client
information or the sublicense of software or other proprietary systems. Although
we have implemented policies to prevent such client information or licenses from
being disclosed to unauthorized parties or used inappropriately, any such
unauthorized disclosure or use could result in a claim against us for
substantial damages. Our contractual provisions attempting to limit such damages
may not be enforceable in all instances or may otherwise fail to protect us from
liability for damages. We do not currently have errors and omissions insurance.

If we cannot integrate future acquisitions into our existing operations, then we
may be unable to manage our operations and expand our business.

                                       36
<PAGE>

     We have been approached from time to time to consider and evaluate
potential business combinations, joint ventures both involving our acquisition
of other companies and potential investments in us or other business
combinations involving our web properties or CMS business. We may engage in
discussions relating to similar transactions in the future. Although we expect
to grow, in part, through business combinations, it is uncertain whether we will
decide to enter into any transaction. If we do enter into a transaction, we
cannot be certain what the terms of the transaction or our timing will be.

Acquiring complementary businesses, products and technologies is an integral
part of our business strategy. Some of the risks attendant to this acquisition
strategy are:

 . difficulties and expenses of integrating the operations and personnel of
acquired companies into our operations while preserving the goodwill of the
acquired entity;

 . the additional financial resources that may be needed to fund the operations
of acquired companies;

 . the potential disruption of our business;

 . our management's ability to maximize our financial and strategic position by
incorporating acquired technology or businesses;

 . the difficulty of maintaining uniform standards, controls, procedures and
policies;

 . the potential loss of key employees of acquired companies;

 . the impairment of relationships with employees, content partners, advertisers
and customers as a result of changes in management; and

 . increasing competition with other entities for desirable acquisition targets.

     Any of the above risks could prevent us from realizing significant benefits
from our acquisitions.

     If our important strategic relationships are discontinued for any reason,
our ability to generate revenue from advertising and e-commerce referrals and
our ability to increase sales of our community building business would be
adversely effected.

  Although our strategic relationships with our content partners and Internet
services providers are a key factor in our overall business strategy, our
strategic partners may not view their relationships with us as significant to
their own business. There is a risk that parties with whom we have strategic
alliance agreements may not perform their obligations as agreed. Our
arrangements with strategic partners generally do not establish minimum
performance requirements but instead rely on the voluntary efforts of our
partners. In addition, most of our agreements with strategic partners may be
terminated by either party with little notice. If important strategic
relationships are discontinued for any reason, our ability to generate revenue
from advertising and e-commerce referral revenues and to provide these services
to our CMS clients may be adversely affected.

        We face risks typical of the Internet industry

Privacy concerns, government regulation and legal uncertainties could adversely
affect activity on the Internet, including our Web sites.

  Laws and regulations that apply directly to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union recently enacted our own privacy regulations. The law of the
Internet, however, remains largely unsettled, even in areas where there has been
some legislative action. It may take years to determine whether and how existing
laws that govern intellectual property, privacy, libel and taxation apply to the
Internet. The development of laws governing these areas may decrease the growth
in the use of the Internet, including our Web sites, or give rise to claims by
our clients for whom we develop or design Web sites or other third parties. In
addition, the growth and development of the e-commerce market may prompt calls
for more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on companies conducting business
online. The adoption or modification

                                       37
<PAGE>

of these laws or regulations could adversely affect our ability to generate
e-commerce referral revenue.

  The Federal Communications Commission is currently reviewing our regulatory
positions on data transmissions over telecommunications networks and could seek
to impose some form of telecommunications carrier regulation on
telecommunications functions of information services. State public utility
commissions generally have declined to regulate information services, although
the public service commissions of some states continue to review potential
regulation of such services. Future regulation or regulatory changes could have
an adverse effect on our business and results of operations.

Imposition of new taxes or fees by the United States Federal government, state
governments or foreign governments on Internet transactions or on the use of the
Internet as a means of communication could adversely effect our advertising or
e-commerce revenue.

     Imposition of sales or other taxes on sales of merchandise purchased by
users of our Web sites from our strategic partners' Web sites by states or
countries where these goods are shipped could have a material adverse effect on
the amount of referral fees we receive from these sales. Imposition of new taxes
or fees by the Federal government of the United States or by foreign governments
on Internet transactions or on the use of the Internet as a means of
communication could also adversely effect our advertising or e-commerce revenue.

We could be liable for online content not covered by our insurance.

     The nature and breadth of information disseminated on our Web sites could
expose us to liability in various areas, including claims relating to:

 . the content and publication of various materials based on defamation, libel,
negligence, personal injury and other legal theories;

 . copyright or trademark infringement and wrongful action due to the actions of
third parties;

 . use of third party content made available through our Web sites via links to
our content partners or other Web sites or through content and material posted
by members in chat rooms and on bulletin boards;

 . damages arising from the use or misuse of the free e-mail services that we
offer; and

 . product information and reviews that we offer.

     In the past, these types of claims have been made, sometimes successfully,
against online service providers and other print publications. Claims of these
kinds against us would result in us incurring substantial costs and would also
be a drain on our financial and other resources. If there were a sufficient
number or several severe claims of this nature, we would need to implement
measures to reduce our exposure and potential liability. In addition to being a
drain on our resources, this may also require taking measures that could make
our Web sites or services less attractive to our registrants and users. This in
turn could reduce traffic on our Web sites, negatively impact the size of our
registered user base, and reduce our advertising and e-commerce revenues. We
carry general liability insurance in the aggregate amount of $3 million and
umbrella coverage in an aggregate amount of $3 million. This coverage may be
insufficient to cover expenses and losses arising in connection with any claims
against us. To the extent our insurance coverage does not cover liability or
expenses we incur, our financial and other resources could be strained.

Our inability to protect our intellectual property rights could adversely affect
our ability to operate our businesses.

     We consider our names, logos and designs as proprietary and try to protect
them under existing United States and international laws relating to protection
of intellectual property. We also developed internal procedures to control
access and dissemination of proprietary information. Despite our precautions,
third parties may succeed in misappropriating our intellectual property or
independently developing similar intellectual property. Protecting our
intellectual property against infringement could result in substantial legal and
other costs and could divert our limited management resources and attention from
our business plans.

     Some of the technology incorporated in our Web sites, and offered to our
content partners and clients of our Web site design and development services, is
based on

                                       38
<PAGE>

technology licensed from third parties. As we continue to introduce new
services, we may need to license additional technology. If we are unable to
timely license needed technology on commercially reasonable terms, we could
experience delays and reductions in the quality of our services, all of which
could adversely affect our business and results of operations, our reputation
and the value of our proprietary information could also be adversely affected by
actions of third parties to whom we license our proprietary information and
intellectual property. If someone asserts a claim relating to proprietary
information against us, we may seek licenses to this intellectual property. We
may not, however, be able to obtain licenses on commercially reasonable terms,
if at all. The failure to obtain the necessary licenses or other rights could
prevent or limit our ability to develop our Web sites.

Our inability to incorporate content management software from a third party into
our own Web sites and those of our clients could adversely effect our ability to
develop content on our own Web sites and to expand our Web site design and
development business.

     In July 1999, we acquired a license from Cortext Ltd., an Israeli software
developer to content management software for use by us in maintaining content on
our own online communities. We acquired a majority control of Cortext in
February 2000. We also offer this software in the operation of the Web sites of
our content partners and community-building clients. We cannot assure you that
we will be able to successfully integrate this software into our own communities
and the communities our CMS clients and to use the same as a platform for the
integration of additional software elements for such communities. If we are
unable to integrate the software into our own, and our clients' Web sites, our
ability to manage content on our communities and to expand our Web site design
and development business could be adversely affected.

     Our applications operate in complex network environments and directly and
indirectly interact with a number of other hardware and software systems. We are
unable to predict to what extent our business may be affected if our systems or
the systems that operate in conjunction with our systems experience a material
failure.

     Known or unknown errors or defects that affect the operation of our
software and systems could result in delay or loss of revenue, interruption of
services, cancellation of contracts and registrants, diversion of development
resources, damage to our reputation, increased service and warranty costs, and
litigation costs, any of which could adversely affect our business, financial
condition and results of operations.

     One of the most likely worst-case scenarios for us is that access to our
Web sites through the Internet would be limited or impossible due to a
telecommunications problem beyond our control. In such a scenario, we would be
dependent on third party telecommunications providers to remedy the problem.

         We are subject to risks related to our stock

Our stock price may be highly volatile, which could result in substantial losses
to investors.

     The trading price of our common stock is likely to be highly volatile due
to a variety of factors, including:

 . actual or anticipated variations in quarterly operating results and changes in
financial estimates by securities analysts;

 . announcements of technological innovations;

 . new products or services offered by us or our competitors;

 . conditions or trends in the advertising or e-commerce market;

 . our announcement of significant acquisitions, strategic partnerships, joint
ventures or capital commitments (or the absence of the same);

 . additions or departures of key personnel; and

                                       39
<PAGE>

 . sales of common stock or the exercise of our outstanding options, warrants or
unit purchase options.

   In addition, the Nasdaq SmallCap Market, where many publicly held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. These fluctuations are often unrelated or disproportionate to the
operating performance of these companies. These broad market and Internet
industry factors may materially adversely affect the market price of our common
stock, warrants, and units regardless of our actual operating performance.

Your investment in our stock may become illiquid and you may lose your entire
investment.

   Under the Nasdaq Stock Market Marketplace Rules, Nasdaq requires Nasdaq
SmallCap Market issuers to comply with applicable requirements for continued
listing on the Nasdaq SmallCap Market. Following the completion of our recent
merger with VCI, Nasdaq initially denied, but subsequently approved, the listing
if our stock and warrants. There is no assurance that we will continue to meet
the continued listing requirements in the future.

   If our common stock is not quoted on the Nasdaq SmallCap Market or listed
on another exchange, trading in our common stock would be covered by the
Exchange Act's "penny stock" rules if our common stock is deemed a penny stock
(as defined below). Under these rules, broker-dealers who recommend penny stocks
to persons other than established customers and "accredited investors" must make
a special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from these rules if the market price is at least $5.00 per share.

   If our securities were to become subject to the regulations applicable to
penny stocks, the market liquidity for these securities would be severely
affected, limiting the ability of broker-dealers to sell these securities and
your ability to sell our common stock in the public market.

Approximately 8,958,229 million, or 54.3%, of our total outstanding shares are
restricted from immediate sale, but may be sold into the market in the near
future, which could cause the market price of our common stock to drop
significantly, even if our business is profitable.

   We have outstanding approximately 16,500,422 shares of common stock, based
on shares outstanding as of April 10, 2000 and assuming (which assumptions shall
apply to the entire discussion under this risk factor) no exercise of any of the
outstanding options under our Incentive Stock Option Plans to purchase
approximately 3,737,057 shares of Virtual Communities, Inc. common stock,
outstanding warrants to purchase approximately 2,662,804 shares of VCI common
stock, outstanding class A or class B warrants or unit purchase options to
purchase approximately 5,620,000 shares of our common stock, or outstanding
warrants to purchase 2,665,696 shares of our common stock issued in connection
with our recent private placement of common stock in April 2000.

   Of the 16,500,422 outstanding shares, approximately 7,542,193 shares, or
45.7%, are freely tradable without restriction under the Securities Act.

   Of the remaining 8,958,229 shares outstanding, these shares will become
available for resale in the public market as described below.

   Approximately 7,058,565 of these shares are subject to tiered lock-up
agreements that our shareholders signed in connection with the merger in October
1999. These lock-up agreements generally prohibit the sale of these shares as
follows:

<TABLE>
<CAPTION>
Number of months after October 29, 1999        Sale permitted under lock-up agreement
---------------------------------------        --------------------------------------
<S>                                            <C>
 3-6 months..............                      25% of shares held at merger closing

 6-9 months..............                      50% of shares held at merger closing

 after 9 months..........                      100% of shares held at merger closing.
</TABLE>

     In addition, the majority of the holders of warrants exercisable into
approximately 1,794,335 shares of our common stock are subject to the tiered
lock-up agreements described above. Notwithstanding the foregoing, we have the
discretion to release any party to the lock-up agreements from the restrictions
imposed on them under compelling circumstances.

                                       40
<PAGE>

     Upon the expiration or release in whole or in part of the restrictions
imposed by the lock-up agreements described above, the persons party to those
agreements will be able to sell their shares subject to the restrictions imposed
by the federal securities laws. Such shares have previously been registered by
the Company in connection with the merger in October 1999.

     Under the terms of the private placement financing agreements we completed
in April 2000 we agreed to file two registration statements registering 518,700
restricted shares of common stock and 2,662,804 restricted shares underlying the
warrants issued pursuant to the financing. At the same time, the Company intends
to register 1,381,864 restricted shares and 315,570 shares underlying warrants
issued to several entities through private placements of the Company's
securities completed from December 1999 through February 2000. The holders of
such restricted shares, warrants, and options have demand and "piggyback"
registration rights with respect their securities in the Company. We intend on
filing the first registration statement registering 2,360,000 shares in May 2000
and a second registration registering 2,000,000 shares in June 2000.

     In addition, in late April 2000, we plan to register our options that are
exercisable into approximately 3,732,282 shares of our common stock issued under
our stock option plans. This registration will permit these option holders to
freely trade our common stock that they receive upon exercise of their options,
and the restrictions imposed by the federal securities laws. Of these options,
approximately 990,000 will have vested by May 1, 2000.

   In September 1999, we filed a Form S-8 registration statement under the
Securities Act to register all shares of common stock issuable pursuant to
outstanding options and all shares of common stock reserved for issuance under
our 1996 Stock Option Plan. This registration statement became effective
immediately upon filing, and shares covered by this registration statement
therefore are eligible for sale in the public markets, subject to options
becoming exercisable, the lock-up agreements described above and Rule 144
limitations applicable to affiliates. As of December 15, 1999 there were
outstanding options to purchase up to 137,000 shares of common stock that will
be eligible for sale in the public market subject to becoming exercisable and
the expiration of the lockup agreements.

     As restrictions on resale end and/or registrations of restricted shares are
effectuated to permit resales of the same, the market price could drop
significantly if the holders of such restricted shares sell them or are
perceived by the market as intending to sell them.

Anti-takeover provisions in our charter could deter a takeover effort, which
could inhibit your ability to receive an acquisition premium for your shares.

     Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock without the need for stockholder approval. The Board may also
determine the economic and voting rights of this preferred stock. Issuance of
preferred stock could impede or prevent transactions that would cause a change
in control of our company. This might discourage bids for our common stock at a
premium over the market price of our common stock and adversely affect the
trading price of our common stock. We have no current plans to issue shares of
preferred stock.

The forward-looking statements made in this prospectus might prove inaccurate,
resulting in a material difference between such statements and our actual
results.

     Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity, performance
or achievements following the merger to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements.

     Such factors include, among other things, those listed under "Risk Factors"
and elsewhere in this prospectus. In some cases, you can identify forward-
looking statements by terminology such as "may," "will," "should," "could,"
"expects," "plans," "intends," "anticipates," "believes," "thinks," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms and other
comparable terminology.

                                       41
<PAGE>

ITEM 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements of the company are included herein, commencing on page
F-1 hereof.

ITEM 9

CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES

The Company engaged the firm of Richard A. Eisner & Company, LLP to report upon
its financial statements for fiscal year 1998. Prior to the Merger with the
Company in October 1999, VCI engaged the firm of Arthur Andersen, LLP to report
upon VCI's financial statements for fiscal year 1998. At the annual meeting in
October 1999, the Company's stockholders ratified the appointment of Arthur
Andersen, LLP as the Company's independent auditors effective upon the Merger
which was a condition to VCI's obligation to consummate the Merger. Richard A.
Eisner LLP resigned as the registrant's certifying accountant effective upon the
ratified appointment date of Arthur Anderson, LLP.

Prior to the merger, the Company had decided to pursue a strategy of an
investment in, or acquisition of, an existing company. The Company's independent
auditors qualified their certifying report for the period for the year ending
December 31, 1998 and for the period from July 20, 1994 through December 31,
1998, under an assumption that the Company would continue as a going concern. In
such reports the Company was reported to have incurred substantial losses since
inception and such losses were expected to continue during Company's development
stage.

The Company did not have any disagreement with Richard A. Eisner LLP regarding
any matter of accounting principles or practices, financial statement,
disclosure or auditing scope or procedure which disagreement(s), if not resolved
to the satisfaction of such accountants would have caused such firm to make
reference in connection with its reports to the subject matter of the
disagreement(s) or any "reportable events" as defined in Rule 304(a)(v) of
Regulation S-K.

The Company requested that Richard A. Eisner LLP furnish it with a letter
addressed to the Commission stating whether it agrees with the above statements.
A copy of such letter, dated as of November 12, 1999, is filed as Exhibit 16.1
to the Company's Form 8- K dated October 29, 1999.

                                       42
<PAGE>

PART III

ITEM 10

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.

(a)  The Company's executive officers and directors are as follows:

<TABLE>
<CAPTION>
<S>                                  <C>
Avi Moskowitz ....................   35   Chairman of the Board, CEO and President
Michael Harwayne .................   30   Chief Operating Officer
Deborah Gaines ...................   45   Vice President, Editorial Services
Jack Rose ........................   36   General Counsel and Secretary
Robert J. Levenson ...............   68   Director
Fred S. Lafer ....................   71   Director
Jonathan W. Seybold...............   57   Director
Allan Dalfen .....................   55   Director
Peter A. Jacobs ..................   55   Director
David Morris .....................   30   Director
</TABLE>

  Avi Moskowitz became Chairman of the Board, President and Chief Executive
Officer of the Company upon the completion of the Company's merger with VCI in
October 1999. Mr. Moskowitz founded VCI in August 1996 serving as Chairman,
Chief Executive Officer and President until it merged with a subsidiary of the
Company in October 1999. Mr. Moskowitz was also the founder of Virtual
Communities Israel Ltd. and served as the entity's sole Director and Chief
Executive Officer until May 1999. From 1994 until 1996, Mr. Moskowitz was a
principal of NetMedia, Ltd., an Israel Internet service provider. From 1986
through 1994, Mr. Moskowitz was President of MedPlus Inc., a New York-based
value-added reseller of healthcare software systems. Mr. Moskowitz attended
Yeshiva College of Yeshiva University.

  Michael S. Harwayne became Vice President of Marketing and Business
Development of the Company upon the completion of the Company's merger with VCI
in October 1999. He joined VCI in March 1999 and became Chief Operating Officer
of the Company in February 2000. From 1995 to 1999, Mr. Harwayne was employed by
McKinsey & Company, Inc. where he was an Associate until 1997, and then an
Engagement Manager. From 1991 to 1993, he held several positions at the
International Data Group, including account representative and management
associate to PC World magazine and circulation manager of Multimedia World. Mr.
Harwayne received a Bachelor of Arts degree, magna cum laude, from Harvard
College in 1991 and received his MBA at Harvard's Graduate School of Business in
1995.

  Deborah Gaines joined the Company as Editorial Director in November  1999 and
became Vice President of Editorial Services in January 2000. Before joining VCI,
Ms. Gaines served as Managing Editor for the Hearst magazine group at Women.com
from 1998-99, spearheading the launch of new sites for Redbook and Good
Housekeeping. From 1997-98, she was Managing Editor of iVillage: The Women's
Network. She has also held editorial positions at Money magazine and Baby
magazine, and written about travel for the New York Post, Ladies' Home Journal,
Modern Bride and others. Ms. Gaines graduated from Yale University and has an
M.A. in literature from Columbia University.

  Jack Rose joined the Company in April 2000 as General Counsel and Secretary.
Prior thereto, from December 1996 to March 2000, Mr. Rose was Chief Executive
Officer and Chief Technology Officer of ineighbors.com, a community based web
site based in White Plains, New York and a member of Reynolds & Rose, P.C., a
White Plains, New York law firm. From February 1993 to December 1996, Mr. Rose
was an associate attorney with Clifford Chance Rogers & Wells, a New York City
law firm, and from September 1990 to February 1993, an associate attorney with
Weil, Gotschal & Manges, a New York City law firm. Mr. Rose received his
Bachelor of Arts degree in Management Information System and Operations
Management from State University of New York, Albany, in 1986, and a law degree
from Hofstra University School of Law in May 1990. He is admitted to the New
York and Connecticut State Bars.

  Jonathan W. Seybold has been a director of the Company since July 1994 and was
Chairman of the Board until the completion of the merger with VCI in October

                                       43
<PAGE>

1999. Mr. Seybold was founder, Chairman and CEO of  Seybold Seminars, Inc., a
company which conducts large scale, technology-based trade shows and conferences
and Seybold Publications, a company which publishes reports on publishing
systems, desktop publishing and internet publishing applications. Both companies
were acquired by Ziff-Davis in November, 1990. He was also co-founder and
Chairman of Pretty Good Privacy, Inc. (PGP), a company which provides software
for encryption of digital information. PGP was acquired by Network Associates,
Inc. in December, 1997.

  Robert J. Levenson became a director of the Company upon the consummation of
the merger in October 1999. Since 1992, he has been a Director of First Data
Corp. ("FDC"), a NYSE company from May 1993 through March 2000 he was an
Executive Vice President of FDC. Mr. Levenson is a managing member of Lenox
Capital Group, LLC. He formerly served as Senior Executive Vice President, Chief
Operating Officer, and Member of the Office of the President of Medco
Containment Services, Inc., a provider of managed care prescription benefits.
Mr. Levenson was a Director of Medco Containment Services, Inc. from October
1990 until December 1992. From 1985 until October 1990, Mr. Levenson was Group
President and Director of ADP. Mr. Levenson is also a director of Vestcom
International, Inc., Superior Telecom, Inc. and Emisphere Technologies, Inc.

  Fred S. Lafer become a director of the Company upon the completion of the
merger in October 1999. From 1994 to the present, Mr. Lafer has been President
of the Taub Foundation, a charitable foundation. Prior thereto, until 1996, Mr.
Lafer was Senior Vice President and Secretary of Automatic Data Processing,
Inc., a provider of employer, financial and data services. He is also a member
of the Board of Vestcom International.

  Allan Dalfen has been a director of the Company since January 1995. Mr. Dalfen
has served as President of Dalfen Corporation, an investment corporation. From
October 1992 to December 1994, Mr. Dalfen served as President and Chief
Executive Officer of Vestro Foods, Inc. and from 1979 to 1992, Mr. Dalfen served
as President and Chief Executive Officer of Weider Health and Fitness. Mr.
Dalfen is currently President, CEO and a Director of Dairy King Food Services, a
Los Angeles-based food company.

  Peter A. Jacobs has been a director of the Company upon completion of the
merger and was a director of VCI since April 1998. Since March 1998, he has
been a director of Hillsdown Holdings PLC, a publicly traded U.K. food and
furniture company, and he has also been Chairman of Hillsdown since March 1999.
In December 1998, Mr. Jacobs became Chairman of Healthcall, Ltd., a doctor's
deputizing service, and in November 1998, he became a director of Bank Leumi
U.K. Since March 1998, Mr. Jacobs has been a director of Allied Domecque, Ltd.,
a U.K.-based food, beverage and spirits company. From May 1991 until August
1999, Mr. Jacobs was Chief Executive Officer of BUPA, the U.K.'s largest private
health care provider and health insurer. Mr. Jacobs received a BSC in Mechanical
Engineering in 1966 and a DMS in Management Studies in 1969 from Aspon
University, Birmingham, England.

  David Morris became a director of the Company upon the completion of the
merger and was a director of VCI since April 1998. Since May 1998, he has been a
director of ENG Ltd., a U.K. IT support company which provides web hosting
network management services. Since February 1998, he has been a director of
Vanco Ltd., a provider of wide area management network systems. Since June 1997,
Mr. Morris has been an employee of Monhouse Ltd., a U.K.-based management
company and, since June 1998, he has been a director of Monhouse. He is also a
director of Kerbybridge Properties, a property investment/development company,
and a director of Voyeur Ltd. and PC Clothing, Ltd., two U.K.-based clothing
companies since February 1998. From 1996 through 1997, Mr. Morris was an
investment trusts specialist for Brewin Dolphin Ltd., a U.K. stock brokerage
firm. From January 1995 to December 1995, Mr. Morris was employed by Net Media
Ltd., an Israeli Internet service provider, that was partially owned by Mr.
Moskowitz until December 1995. Mr. Morris received a Bachelor of Arts degree
from University of Westminster, London in 1993.

Other Key Personnel

  Anthony Ruggiero, 41, joined the Company as Director of Advertising Sales and
Marketing in October 1999. Prior thereto, in Spring 1999, Mr. Ruggiero was
an On-Line Sales Manager for courant.com a division of Time Mirror Corporation
and from 1997 through 1998 Sales Manager for Americast Division of SNET, a New
Haven, Connecticut, company. From 1995 to 1997, he was a Sales Manager for TCI,
a Berlin, Connecticut cable television and telecommunications company. Mr.
Ruggerio received a Bachelors Degree in Finance and Management from Mercy
College, Dobbs Ferry, New York in 1982.

  Yolanda Friedman, 35, joined the Company as Director of Business Development
in July 1999. Prior thereto, Ms. Friedman was associated with McKinsey &
Company, New York City, from September 1996 to June 1999, first as a Business
Analyst and thereafter, as an Associate. From June 1995 to August 1995, she was
employed as an Intern with Christie's Auction House, New York City. Ms. Friedman
received a Bachelor of Arts degree in Art History from The Wharton School and
the University of Pennsylvania in 1996.

     Arnold Roth became Chief Operating Officer of the Company's VCIL subsidiary
in February 2000. Prior to joining VCIL, Mr. Roth served as Chief Executive
Officer of Targetix Ltd., a Nes-Ziyona, Israel, Internet company from 1999 to
February 2000. From 1995 to 1999, he was Chief Executive Officer of Clockwork
Group, an Austin, Texas based subsidiary of the Formula Group, Herzliya, Israel.
Prior thereto, he was

                                       44



<PAGE>

Chief Executive Officer of Pegasus Medical Inc., a Boston based medical company
prior to its sale to HBOC Inc., and Chief Executive Officer of Acumen Systems
Inc., an Israeli/US text-recognition company. From 1983 to 1988, Mr. Roth was a
founder and managing director of Software Corporation of Australia Ltd., an
Australian company listed on the Australian Stock Exchange. He was a partner in
Roth Warren, a Melbourne law firm from its inception in 1978 until 1985. Mr.
Roth received a Bachelors of Economics degree in 1973 and an LL.B. degree in
1974 from Monash University, Clayton, Australia. He is admitted to practice as a
lawyer in Australia and Israel.

  David L. Kahn, 43, has been the Executive Vice President and General Counsel
of the Company's VCIL subsidiary since October 1996. From 1990 to 1996, Mr. Kahn
was associated with Corrine Davar Property Consultants, a Jerusalem real estate
firm. Mr. Kahn received a Bachelors Degree in Political Science from Yeshiva
University, New York in 1978 and a J.D. Degree from Benjamin N. Cardozo School
of Law, New York in 1981.

  Ellen Cohl, 33, became the Controller of VCIL in August 1997 and Vice
President -Finance in January 2000. From 1995 through 1997, she was a Senior
Auditor with Luboshitz Kasierer & Co., the Israeli affiliate of Arthur Andersen
& Co., the accountants for VCI, VCIL and VCIIP. During 1994, Mrs. Cohl was a
Special Project Leader at Deloitte & Touche LLP, New York. From July 1992
through April 1994 she was a Senior Auditor with Bank Leumi Trust Company. Mrs.
Cohl is a Certified Public Accountant and received a Bachelor of Science Degree
from New York University in 1988, and a Masters Degree in Business
Administration from Baruch College, The City University of New York in 1995.

All of the above directors hold office until the next annual meeting of the
stockholders in June 2000 and until their successors have been duly elected and
qualified. All of the above executive officers were elected by and serve at the
direction of the Board of Directors of the Company. All of the officers serve at
the discretion of the Board of Directors. There are no family relationships
among any of the directors, executive officers or key personnel.

(b) Section 16(a) Beneficial Ownership Reporting Compliance

  Based solely upon a review Forms 3,4 and 5 furnished to the Company, the
Company does not believe that any director, officer or beneficial owner of more
than 10% of any class of the Company's equity securities failed to file on a
timely basis, reports required by Section 16(a) of the Securities Exchange Act
of 1934 during the last fiscal year.

BOARD COMMITTEES

  The Board of Directors has a Compensation Committee, which makes
recommendations to the Board concerning salaries and incentive compensation for
officers and employees of the Company and may administer the Company's stock
option plan. The members of the Compensation committee are Robert Levenson, Fred
Lafer and Peter Jacobs. The Board of Directors also has an Audit Committee,
which reviews the results, and scope of the audit and other accounting related
matters. The members of the Audit Committee are David Morris and Allan Dalfen.

                                       45
<PAGE>

ITEM 11

EXECUTIVE COMPENSATION

Summary Compensation Table

Name and                Year    Salary      Bonus     Options      Other
principal position                                               Compensation
----------------------------------------------------------------------------
Compensation
------------
<TABLE>
<CAPTION>

<S>                      <C>   <C>          <C>      <C>          <C>
Avi Moskowitz            1999  $150,175(1)  $     0   748,150(3)  $34,901(2)
Chairman of the Board    1998  $104,950     $     0   439,682(4)  $17,900
President and CEO        1997
And Chairman

Gregory Zink             1998  $ 97,500
Former Acting CEO        1997  $ 40,000(5)

Steven Gumins (6)        1997  $ 68,750                           $50,000(8)
Former CEO

Deborah Griffin (7)      1997  $ 64,516                           $50,000(8)
COO

Theodore Lanes           1998  $ 86,250     $10,000
Former CFO               1997  $ 82,500

</TABLE>

(1) Mr. Moskowitz's compensation for 1999 was received pursuant to two separate
agreements, as follows: A. an employment agreement, effective as of January 1,
1998, between Mr. Moskowitz and Virtual Communities Israel Ltd. This employment
agreement was terminated in May 1999.  B. an employment agreement, effective as
of June 1, 1999, between Mr. Moskowitz and Virtual Communities Inc.

(2) Includes: $5,000 in the form of the use of a company automobile and related
expenses;  $3,798 in the form of life insurance premium;  $2,890 in the form of
amounts paid by Virtual Communities Israel Ltd. for "Managers Insurance", a type
of pension, insurance and severance fund commonly offered by Israeli employers;
and $1,016 in the form of supplemental health insurance and holiday gifts. In
1999, Mr. Moskowitz received, in part for services rendered to Virtual
Communities Israel Ltd. during 1999, $22,197 in the form of reimbursement for
vacation time not taken since 1997.

(3) Represents 230,200 shares of common stock underlying options granted to Mr.
Moskowitz in 1999.

(4) Represents 278,542 shares of common stock underlying options granted to Mr.
Moskowitz in 1997, and 161,140 shares of common stock underlying warrants
issued, to Mr. Moskowitz in 1998.

(5) Amounts paid for consulting services.

(6) In December, 1996, the Company entered into a three-year employment
agreement with Mr. Gumins. The agreement provided for a base annual salary of
$150,000 and bonuses at the discretion of the Board. Mr. Gumins resigned as
Chief Executive Officer in May, 1997.

(7)  In December, 1996, the Company entered into a three-year employment
agreement with Ms. Griffin. The agreement provided for a base annual salary of
$150,000 and bonuses at the discretion of the Board. Ms. Griffin resigned as
Chief Operating Officer in May 1997.

(8)  Represents severance payment.

Option Grants

  The following table provides information regarding warrants issued during the
year ended December 31, 1999 to officers of the Company. Virtual Communities,
Inc. has never granted stock appreciation rights.

                                       46
<PAGE>

<TABLE>
<CAPTION>

                                Option Grants in Last Fiscal Year Individual Grants
                        ----------------------------------------------------------------
                                          Percent of Total
                                         Options Granted to
                                              Employees
                            Number of    (net of forfeitures)
                           Securities         in Fiscal       Exercise or Base
                           Underlying         Year Ended      Price Per Share Expiration
Name                     Options Granted  December 31, 1999   ($/Share)         Date
----                     --------------- -------------------- ---------------- ----------
<S>                      <C>                <C>                 <C>              <C>
Avi Moskowitz.......     230,200(1)         13.1%(2)            $2.10       June 30, 2004

Michael Harwayne         115,100(3)          6.5%(4)            $0.81       March 2, 2004
                          50,000(5)          2.8%(6)            $3.62       Nov. 10, 2004

Deborah Gaines            86,325(7)          4.9%(8)            $2.10       Oct. 25, 2004
</TABLE>

(1) These options were issued in consideration of Mr. Moskowitz's agreement to
relocate to New York in June 1999 pursuant to the Company's employment agreement
with Mr. Moskowitz.

(2) Based on an aggregate of 1,757,428 options and warrants issued (net of
forfeitures) to employees in the year ended December 31, 1999, including options
issued to Mr. Moskowitz.

(3) These options were issued under the Company's 1999 ISOP upon Mr. Harwayne's
joining the Company in March 1999. A third of these options vest over a three-
year period commencing on the first anniversary of the date of their grant.

(4) Based on an aggregate of 1,757,428 options and warrants issued (net of
forfeitures) to employees in the year ended December 31, 1999, including options
issued to Mr. Harwayne.

(5) These options were awarded based on Mr. Harwayne's performance in accordance
with his employment agreement with the Company.

(6) Based on an aggregate of 1,757,428 options and warrants issued (net of
forfeitures) to employees in the year ended December 31, 1999, including options
issued to Mr. Harwayne.

(7) These options were issued under the Company's 1999 ISOP upon Ms. Gaines'
joining the Company in October 1999. A third of these options vest over a three-
year period commencing on the first anniversary of the date of their grant.

(8) Based on an aggregate of 1,757,428 options issued (net of forfeitures) to
employees in the year ended December 31, 1999, including options issued to Ms.
Gaines.



Fiscal Year End Option Values

  The following table provides information concerning unexercised options held
by officers as of December 31, 1999. None of the officers exercised any options
during the year ended December 31, 1999.


<TABLE>
<CAPTION>
                      Aggregated Option Exercises in Last Fiscal
                        Year and Fiscal Year-End Option Values
             ----------------------------------------------------------------

                    Number of Securities                  Value of Unexercised
                   Underlying Unexercised                 In-the-Money Options
                 Options at Fiscal Year End               at Fiscal Year End(1)
                 ---------------------------------      -------------------------
Name             Exercisable        Unexercisable       Exercisable Unexercisable
----             -------------      --------------      ----------- -------------
<S>               <C>      <C>       <C>       <C>      <C>         <C>
Avi Moskowitz..   185,676  (2)       323,066   (2)      $603,447    $1,049,964
                  161,140  (3)           0     (3)      $523,705        0
                   23,018  (4)        11,512   (4)       $74,808       $37,414

Michael Harwayne     0     (5)       165,100   (5)         0          $536,575

Deborah Gaines       0     (6)        86,325   (6)         0          $280,506
--------
</TABLE>

                                       47
<PAGE>

(1) Assumes a market price for the Common Stock of the Company at December 3l,
1999 of $3.25 per share.

(2) Represents 508,742 shares of the Company's Common Stock underlying options
held by Mr. Moskowitz as of December 31, 1999. 278,542 options are exercisable
at $.40 per share and 230,200 options are exercisable at $2.10 per share.

(3) Represents 161,140 shares of the Company's Common Stock underlying warrants
held by Mr. Moskowitz as of December 31, 1999. 115,100 warrants are exercisable
at $1.00 per share and 46,040 warrants are exercisable at $.65 per share.

(4) Represents 34,530 shares of the Company's Common Stock underlying options
held by Helen Moskowitz, wife of Avi Moskowitz, as of December 31, 1999. The
options are exercisable at $.65 per share.

(5) Represents 165,100 shares of the Company's Common Stock underlying options
held by Mr. Harwayne as of December 31, 1999. 115,100 options are exercisable at
$.81 per share and 50,000 options are exercisable at $3.62 per share.

(6) Represents 86,325 shares of the Company's Common Stock underlying options
held by Ms. Gaines' as of December 31, 1999. All the options are exercisable at
$2.10 per share.


DIRECTORS COMPENSATION

     None of our directors receive cash compensation, however, directors receive
expense reimbursement for services provided as a director, including attendance
at meetings of the Board of Directors or at meetings of committees of the Board
of Directors of which they are members. David Morris was reimbursed by the
Company for travel and lodging in the amounts of $6,626 in 1999.

     Directors are entitled to receive options pursuant to the Company's Stock
Option Plans.

     In February 1997, we entered into a consulting agreement with Mr. Seybold,
the Company's former Chairman and a current director, pursuant to which he
received five-year options to purchase 6,000 shares of common stock. All of such
options are exercisable at $5.00 per share commencing one year from the date of
grant. Under the same consulting agreement, Mr. Seybold received 10,000 five-
year options exercisable at the market price at February 11, 1998 ($2.25), for
remaining Chairman of the Board for 1998.

     In February 1997, we also granted options to purchase 1,000 shares of our
common stock at an exercise price equal to the fair market price of our common
stock on the date of the grant ($5.00) to each of William Blase, M. Caroline
Martin, Allan Dalfen, Brian Wasserman, Kenneth W. Krugler and Gregory L. Zink,
who was also President of the Company from inception in 1994 until the Company's
merger with VCI in October 1999. Such options are exercisable until October 29,
2001. As of March 31, 2000, Mr. Blase had exercised 8,000 options.

     In April 1998, we granted options to purchase 10,000 shares of our common
stock at an exercise price equal to the fair market value of our common stock on
the date of the grant ($.875) to each of William Blase, M. Caroline Martin,
Allan Dalfen, Brian Wasserman and Kenneth W. Krugler. Such directors each vested
a total of 6,000 of their options prior to the Company's merger with VCI in
October 1999. Such options are exercisable until October 29, 2001. On such date,
we also granted options to purchase 10,000 shares of our Common Stock at an
exercise price equal to the fair market value of our common stock on the date of
the grant ($.875) to Theodore Lanes, who served as our Chief Financial Officer
until the Company's merger with VCI in October 1999. Such options are
exercisable until October 29, 2001.

     In April 1999, we also granted options to purchase 22,500 shares of our
common stock to each of Messrs. Lanes and Zink at an exercise price equal to the
fair market value of our common stock on the date of the grant ($1.00) in
consideration for their services to the Company from April 1, 1999 through June
30, 1999. Such options are all exercisable until October 29, 2001. As of March
31, 2000, Mr. Lanes had exercised all of his options. In April 1999, the Company
also issued options to purchase 2,000 shares of our common stock at $1.50 per
share to each of William Blase, M. Caroline Martin, Allan

                                       48
<PAGE>

Dalfen, Brian Wasserman and Kenneth W. Krugler, former directors of the Company.
Such options are exercisable until October 29, 2001.

     On September 10, 1999, Mr. Zink was granted options to purchase 30,000
shares of our common stock at $4.3125 per share as compensation for services
from July 31, 1999 through the consummation of the merger on October 29,1999.

     In January 1998, Virtual Communities, Inc. granted to each of David Morris,
Sonja Simon and Peter A. Jacobs options to purchase 57,550 shares of our common
stock pursuant to the 1998 Stock Option Plan, exercisable at a price equal to
$0.65 per share. These options vest in equal amounts over three years.

     In September 1999, David Morris was granted an additional option to
purchase 57,550 shares of our common stock pursuant to the 1999 Stock Option
Plan in consideration for financial consulting services provided to Virtual
Communities, Inc. since 1997.

     In September 1999, Avi Moskowitz was granted an additional five-year option
to acquire 230,200 shares at $2.10 per share in consideration for his relocation
to New York.

     In November 1999, the Company granted five-year options which vest over a
three- year period into 50,000 shares of our common stock to each of Jonathan
Seybold and Alan Dalfen, members of the Board prior to the merger with VCI in
October 1999, and Robert Levenson and Fred Lafer, two newly elected members of
the Board. The options are exercisable at a price of $3.69 per share.

EMPLOYMENT AGREEMENTS

In June 1999, Virtual Communities, Inc. entered into an employment agreement
with Avi Moskowitz, our President and Chief Executive Officer. The agreement is
for an initial three-year term, which will extend automatically unless either
party gives written notice at least 90 days prior to the end of the initial
term. If the agreement is automatically renewed, it will continue until
terminated by either party pursuant to the agreement. Mr. Moskowitz receives an
annual base salary of $182,700 (subject to change at the discretion of the Board
of Directors), and will be eligible to receive annual bonuses as may from time-
to-time be awarded by the Board of Directors. The agreement entitles Mr.
Moskowitz to incentive stock options to purchase 230,200 shares of our common
stock, which options vest over three years and are subject to the 1999 Stock
Incentive Plan and a related option agreement, and provides that Mr. Moskowitz
is eligible for such other options as may be granted by the Board of Directors.

Mr. Moskowitz is also entitled to other benefits including the use of an
automobile and life insurance, and is entitled to participate in benefit plans
that may be established by us. During the term of his employment and for one
year thereafter, Mr. Moskowitz is prohibited from engaging in any business
competitive with us. The agreement also imposes confidentiality and assignment
of work product obligations on Mr. Moskowitz. In the event the agreement is
terminated due to Mr. Moskowitz's death, for 6 months following his death we are
obligated to pay the premiums for any continuation coverage for Mr. Moskowitz's
immediate family pursuant to the Consolidated Omnibus Budget Reconciliation Act
("COBRA"). In the event the agreement is terminated because Mr. Moskowitz
becomes permanently disabled, for 6 months following such termination we are
obligated to pay the premiums for any continuation coverage for Mr. Moskowitz
and his immediate family pursuant to COBRA. At any point during the term of the
agreement, we are able to terminate Mr. Moskowitz "without cause" (as defined in
the agreement) upon 12 months notice, provided Mr. Moskowitz receives his
compensation during the notice period. At any point during the term of the
agreement, Mr. Moskowitz is able to terminate the agreement for "good reason"
(as defined in the agreement), and we will be obligated to pay Mr. Moskowitz's
compensation as if Mr. Moskowitz had been terminated by us without cause.

     Pursuant to a separate arrangement, Virtual Communities, Inc. reimbursed
Mr. Moskowitz for $10,000 of the expenses he incurred in moving his family from
Israel to the New York City area.

     In February 1999, the Company entered into an employment agreement with
Michael Harwayne to serve as the Company's Vice President of Business
Development and Marketing. In February 2000, he was appointed Chief Operating
Officer. Pursuant to the terms of the agreement, Mr. Harwayne received a salary
of $90,000 per annum for the first four months of the term which amount
increased to $125,000 per annum thereafter. Mr. Harwayne was also granted an
option to acquire up to 100,000 shares of Common Stock of Virtual Communities,
Inc. under the Company's Incentive Stock Option Plan at the fair market value of
the shares at the date of grant for an exercise price of $.81 per share. One

                                       49
<PAGE>

third of such shares vest on each of the first three anniversaries of the date
of Mr. Harwayne's employment. Subject to approval by the Company's Board of
Directors, Mr. Harwayne was also entitled to acquire options exercisable into an
additional 100,000 shares of Common Stock at an exercise price equal to the then
fair market value of the Common Stock of the Company on the date of grant of the
option in the event he reaches certain performance targets as determined by the
Company. 50,000 of such options were granted to Mr. Harwayne in November 1999
and the remaining 50,000 options were granted by the Company in February 2000
when he was promoted to Chief Operating Officer of the Company. Either party may
terminate the Employment Agreement for any reason or without cause, provided
that Mr. Harwayne provides notice in writing no less than sixty (60) days prior
to the effective date of such termination or the Company submits to him notice
in writing no less than ninety (90) days prior to the effective date of such
termination. The agreement contains confidentiality provisions and Mr. Harwayne
has undertaken that he will not engage in a competing business anywhere in the
world during the term and for a period of twelve (12) months thereafter.

     In October 1999, the Company entered into an employment agreement with
Deborah Gaines to serve as the Company's Editorial Director. In January 2000, Ms
Gaines was promoted to Vice President of Content Services. Pursuant to the terms
of the agreement, Ms. Gaines received a salary of $90,000 per annum for the
first four months of the term which amount increased to $95,000 per annum
thereafter. Upon her appointment as a Vice President, Ms. Gaines' salary
increased to $125,000 per annum. Ms. Gaines was also granted an option to
acquire up to 75,000 shares of Common Stock of Virtual Communities, Inc. under
the Company's Incentive Stock Option Plan at the fair market value of the shares
at the date of grant for an exercise price of $2.10 per share. One third of such
shares vest on each of the first three anniversaries of the date of Ms. Gaines'
employment. Either party may terminate the Employment Agreement for any reason
or without cause, provided that Ms. Gaines on notice in writing no less than
sixty (60) days prior to the date of such termination. Ms. Gaines' agreement
contains confidentiality provisions and she has undertaken that she will not,
directly or indirectly, on her own behalf or in the service or on behalf of
others, engage in or be involved in any competing business anywhere in the world
during the term and for a period of twelve (12) months thereafter.

STOCK OPTION PLANS

In connection with the signing of the merger agreement, substantially all of the
option holders of the Company signed agreements not to dispose of their
securities for a period of 180 days after the consummation of the merger. In
connection with the merger, our board of directors and stockholders approved a
new 1999 stock incentive plan.

Prior to the merger, VCI had adopted a 1997 Stock Option Plan, 1998 Stock Option
Plan and 1999 Stock Option Plan (the "VCI Plans"). The Company assumed the VCI
Plans, and all outstanding options under them, and the compensation committee of
our Board is the administrator of the VCI Plans as well as the Company's
original plan.

Each plan has terms substantially similar to the other. The purpose of each plan
is to provide an incentive to employees, directors and consultants of our
company and our subsidiaries, and to offer additional inducement in obtaining
the services of such persons. The VCI Board of Directors adopted the 1997, 1998,
and 1999 plans on May 20, 1997, December 13, 1998, and April 28, 1999,
respectively. The shareholders of VCI approved the 1997 plan on May 20, 1997,
and the 1998 and 1999 plans in September 1999.

Each plan provides for the grant of both incentive stock options and non-
qualified stock options. The 1997 and 1998 plans limit the number of shares of
common stock subject to options granted under the plan to any one employee
during any one calendar year to 250,000. The 1999 plan originally set this limit
at 100,000, but was amended and restated to increase this limit to 300,000
shares.

VCI reserved 726,000 shares (835,626 post merger shares) of common stock for
issuance under the 1997 plan. As of March 31, 2000, options for all 835,626
shares were granted and outstanding, and 35,000 options had been exercised. With
respect to the 1998 plan, 524,000 shares (603,124 post merger shares) were
reserved for issuance. As of March 31, 2000, options for all 524,000 shares were
granted and outstanding, and no options had been exercised. With respect to the
1999 plan, 500,000 shares were originally reserved for issuance. The amended and
restated 1999 plan increased the number of shares reserved for issuance by
500,000 for a total of 1,000,000 shares (1,151,000 post merger shares). As of
March 31, 2000, options for 847,117 shares were granted and outstanding
(975,031 post shares), options for 152,883 shares (175,968 post merger shares)
were available for grant, and 38,328 options had been exercised.

                                       50
<PAGE>

In addition, at our Annual Meeting held in October 1999, our shareholders
approved a 1999 Incentive Stock Option Plan and reserved for issuance 1,000,000
shares under the Plan. Due to significant hiring of employees by the Company and
the Company's use of incentive options to attract qualified personnel during Q4
1999 and Q1 2000, the Company's Board of Directors increased the number of
shares reserved for issuance under our 1999 Plan by 500,000 for a total of
1,500,000 shares. As of March 31, 2000, options for 1,318,500 shares were
granted and outstanding under the plan, options for 181,500 shares were
available for grant and no options had been exercised.

The total number of shares exercisable from options granted under all the plans
is 3,658,954 shares. As of March 31, 2000, options totaling 731,630 shares have
vested.

Each plan is administered by a Board committee thereof subject to the provisions
of each plan, the plan administrator has the authority to determine which
eligible persons shall receive grants, the time of grant, the type of grant and
the number of shares underlying the options, the term of the options, the
vesting schedule and other option terms.

The exercise price for options granted under the plans is to be determined by
the plan administrator. However, the exercise price of all incentive stock
options must be at least equal to the fair market value of the underlying shares
on the date of grant. With respect to any optionee who owns capital stock
possessing more than 10% of the voting power of all classes of stock, the
exercise price of any incentive stock option must be not less than 110% of the
fair market value of the underlying shares on the date of grant. Each plan
provides for cashless exercise.

The plan administrator establishes the term of each option granted pursuant to
the plans. The maximum term, however, for incentive stock options is ten years.
With respect to any incentive stock option granted to an optionee who owns
capital stock possessing more than 10% of the voting power of all classes of
stock, the maximum term is five years. Options are subject to earlier
termination as provided in the plans.

Options are exercisable at such times and in such installments as the plan
administrator provides in the terms of the individual option agreement. Subject
to the terms of the plans, an optionee shall not have the rights of a
shareholder until the date of issuance of a stock certificate to the optionee
for the shares underlying the exercised option.

Except as provided in the individual option agreement, any optionee whose
relationship with us has terminated for any reason other than death or
disability may exercise his or her options (if otherwise exercisable) for 3
months following the date of termination if the employee optionee has resigned,
or for one year following the date of termination if the employee optionee is
terminated by us, or the optionee is our director or consultant. If, however,
such relationship is terminated by us for cause or without our consent, the
optionee's options terminate immediately. With respect to non-employee
directors, except as provided in the individual option agreement, a non-employee
director optionee whose directorship with us has terminated for any reason other
than death or disability may exercise his or her options (if otherwise
exercisable) for three months following the date of termination. If such
directorship is terminated for cause, the options terminate immediately.

The plans also provide that in the event of the death or disability of an
optionee, such optionee (or the optionee's representative) is entitled, under
the appropriate  circumstances, to exercise their options (if otherwise
exercisable) for up to one year from the date of death or termination due to
disability.

In the event of a stock dividend, recapitalization, certain mergers, split-up,
combination or exchange of shares or similar corporate event which results in a
change in the number or kind of our shares of common stock, the aggregate number
and kind of shares subject to options under the plans and the related exercise
price shall be adjusted accordingly. In the event of "corporate transactions" or
a "change in control" (as defined in the plans), or upon our dissolution, an
optionee's vesting rights under the plans are accelerated.

With respect to the 1997, 1998 and 1999 plans, no option may be granted after
May 31, 2007, December 31, 2001 and December 31, 2001, respectively. Each plan
may be terminated or amended by the Board of Directors generally without
shareholder approval. However, shareholder approval is required for certain
types of amendments as provided in the plans. No termination or amendment of the
plans may be made that adversely affects the rights of an existing option
holder, without such person's consent. Options granted under the plans may not
be transferred other than by will or pursuant to the laws of descent and
distribution.

                                       51
<PAGE>

ITEM 12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

  The following table sets forth certain information as of April 10, 2000,
regarding the ownership of Common Stock by (i) each person known by the Company
to own beneficially more than 5% of each class of outstanding Common Stock, (ii)

<TABLE>
<CAPTION>
  Name and Address of Beneficial        Number of Shares Beneficially     Percentage of Shares Beneficially
              Owner(2)                              Owned                              Owned(1)
              --------                              -----                              --------
<S>                                                 <C>                                   <C>
Avi Moskowitz(3)                                    609,693                               3.69%

Peter A. Jacobs(4)                                  205,989                               1.24%

David Morris(5)                                      97,249                                .58%

Michael Harwayne (6)                                 38,366                                .23%

Robert J. Levenson (7)                               54,809                                .33%

Jonathan Seybold(8)                                 157,464                                .95%

Allan Dalfen(9)                                       9,000                                .05%

Fred Lafer(10)                                       54,809                                .33%

Paul and Hannah Lindenblatt(11)                     830,446                               5.03%

Roth Trust(12)                                    1,981,446                              12.01%

Net Results Holdings, LLC(13)                     1,347,687                               8.16%

Grato Holdings (14)                                 798,553                               4.84%

All Directors and Executive Officers              1,227,379                                7.4%

---------------
</TABLE>

(1) Percentage of the Company's common stock shares beneficially owned is based
upon 16,500,422 shares of common stock outstanding as of April 10, 2000. Such
number of shares does not include 12,019,861 shares issuable upon the exercise
of warrants and options currently outstanding.

(2) Except as otherwise provided, the address for all beneficial owners is c/o
Virtual Communities, Inc., 589 Eighth Avenue, New York, NY 10018. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, the beneficial owners have sole voting and investment power with
respect to all shares of VCI common stock set forth opposite their names.

(3) Includes options exercisable for 301,559 shares of our common stock
exercisable within 60 days after April 10, 2000, including 23,017 options held
by Helen Moskowitz, wife of Avi Moskowitz. Also includes warrants exercisable
for 161,140 shares of common stock exercisable within 60 days after April 10,
2000. Does not include 1,981,446 shares of our common stock held by the Roth
Trust, of which Mr. Moskowitz is a potential beneficiary. Mr. Moskowitz
disclaims beneficial ownership of these shares.

                                       52
<PAGE>

(4) Includes options exercisable for 38,362 shares of our common stock and
warrants exercisable for 3,270 shares of common stock exercisable within 60 days
after April 10, 2000. Does not include options exercisable into 69,164 shares
not exercisable withhin 60 days of April 10, 2000.

(5) Includes options exercisable for 38,362 shares of our common stock
exercisable within 60 days after April 10, 2000. Also includes warrants
exercisable for 58,921 shares of our common stock exercisable within 60 days
after April 10, 2000. Does not include options exercisable into 69,164 shares
not exercisable withhin 60 days of April 10, 2000. Does not include 775,886
shares of our common stock held by Grato Holdings Limited, which holds the
shares on behalf of Ramp Trustees Limited, trustees of a trust of which Mr.
Morris is a potential beneficiary. Also does not include 286,280 shares of our
common stock held by Business Systems Consultants Ltd., which is controlled by a
trust of which Mr. Morris is a potential beneficiary. Also does not include
warrants exercisable for 22,667 shares of our common stock exercisable within 60
days after April 10, 2000, held by Grato Holding Limited, which is controlled by
a trust of which Mr. Morris is a potential beneficiary. Also does not include
warrants exercisable for 445,913 shares of common stock exercisable within 60
days after April 10, 2000, held by Business Systems Consultants Ltd., which is
controlled by a trust of which Mr. Morris is a potential beneficiary. Mr. Morris
disclaims beneficial ownership of our common stock held by Grato Holdings
Limited and Business Systems Consultants Ltd., and the warrants to purchase
shares of our common stock held by Grato Holdings Limited and Business Systems
Consultants Ltd. The address for Business Systems Consultants Ltd. is 31-33 Le
Pollet Street, Peterport, Guernsey, Channel Islands GY1 4JG.

(6) Does not include options exercisable into 176,734 additional shares of our
common stock held by Mr. Harwayne not exercisable prior to June 10, 2000.

(7) Does not include options exercisable into 50,000 shares of common stock
granted in November 1999 not exercisable within 60 days of April 10, 2000.

(8) Includes 70,732 shares held by the Seybold Family Trust immediately
exercisable warrants to purchase an additional 70,732 shares and options to
purchase 16,000 shares of our common stock. Mr. Seybold is a trustee of such
Trust, the beneficiaries of which are his wife and his children. Does not
include options exercisable into 50,000 shares of common stock granted in
November 1999 not exercisable withhin 60 days of April 10, 2000. The address of
such trust is P.O. Box 1315 East Sound, Washington 98245. The address of Mr.
Seybold is c/o Virtual Communities, Inc., 589 8th Avenue, New York, New York
10018.

(9) Includes options to purchase 9,000 shares of our common stock. Does not
include options exercisable into 50,000 shares of common stock granted in
November 1999 not exercisable withhin 60 days of April 10, 2000.

(10) Does not include options exercisable into 50,000 shares of common stock
granted in November 1999 not exercisable withhin 60 days of April 10, 2000.

(11) Sister and brother-in-law of Mr. Moskowitz. Mr. Moskowitz disclaims
beneficial ownership of these shares.

(12) The address of the Roth Trust is c/o Line Holdings Ltd., 57-63 Line Wall
Road, Gibraltar. Line Holdings Ltd. holds these shares as trustee of the Roth
Trust. Avi Moskowitz, President and Chief Executive Officer of the Company is a
potential beneficiary of the Roth Trust. Mr. Moskowitz disclaims beneficial
ownership of these shares. Potential beneficiaries thereof currently have no
voting power nor the power to direct the vote of such shares nor any investment
power, including the power to dispose or direct the disposition of the shares
that are held by the trusts. Potential beneficiaries of the trust do not have
the foreseeable right within 60 days to acquire ownership, voting power and/or
investment power over such securities.

(13) Includes warrants exercisable into 72,563 shares of Common Stock held by an
affiliate of Net Results Holdings, LLC ("NRH") exercisable within 60 days after
April 10, 2000. Does not include 133,582 shares of Common Stock held by Harry
Fox, the Chairman and CEO of NRH who is a former director of VCI, nor options
currently exercisable into 19,181 shares of Common Stock exercisable within 60
days after April 10, 2000 which were granted to Mr. Fox in connection with his
service as a VCI director. Also does not include 264,848 shares of Common Stock
transferred by NRH in March 2000 to certain officers, directors and employees of
NRH. The address of NRH is 151 West 25th Street, New York, New York 10001.

(14) Shares are held by Grato Holdings Limited on behalf of Ramp Trustees
Limited, trustees of a trust of which Mr. Morris is a potential beneficiary.
Potential beneficiaries thereof currently have no voting power nor the power to
direct the vote of such shares nor any investment power, including the power to
dispose or direct the disposition of the shares that are held by the trusts.
Potential beneficiaries of the trust do not have the foreseeable right within 60
days to acquire ownership, voting power and/or investment power over such
securities. Includes warrants exercisable for 22,667 shares of Common Stock
exercisable within 60 days after April 10, 2000. The address for Grato Holdings
is 57-63 Line Wall Road, Gibraltar. Grato disclaims beneficial ownership of all
such shares that it holds on behalf of the trust.

                                       53
<PAGE>

ITEM 13

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In January 1996, Virtual Communities Israel, Ltd. ("VCIL"), a subsidiary of the
Company, purchased equipment, intellectual property rights and contractual
rights from Avi Moskowitz, our President, Chief Executive Officer and Chairman,
and his wife, Helen Moskowitz, in return for an obligation to pay $100,000. In
June 1997, VCIL sold these assets to VCI, and we assumed the payment obligation.
In December 1998, VCI permitted the Moskowitzes to convert $60,000 of this
obligation into shares of VCI's common stock at a rate of $.47 per share. VCI
paid the remaining $40,000 to the Moskowitzes in the form of cash and by barter
between May 1998 and January 1999.

In June, 1998, Mr. Moskowitz received a warrant exercisable until June 30, 2001
into 115,100 shares of our common stock at an exercise price of $1.00 per share
in connection with his agreement to guarantee bank lines of credit for VCIL in
the amount of $130,000 during 1997 and 1998. In December 1998, Mr. Moskowitz
received a warrant exercisable until December 31, 2001 into 46,040 shares of our
common stock at $.65 per share in consideration for the deferral of a portion of
his salary from July through November 1998 and a reduction in his salary from
December 1998 through February 1999.

In April 1997, Virtual Communities, Inc. borrowed $100,000 from Business Systems
Consultants ("BSC"), an entity that is affiliated with the family of David
Morris, a Virtual Communities, Inc. director. In December 1998, Virtual
Communities, Inc. permitted BSC to convert the principal and accrued interest of
$16,900 into 286,280 shares of Virtual Communities, Inc. common stock at a rate
of $.47 per share. While the original conversion rate on the loan was $.60 per
share, Virtual Communities, Inc. lowered the conversion rate as an incentive to
BSC to convert the loan. In consideration of the BSC loan, Virtual Communities,
Inc. also issued to BSC three two-year warrants, each expiring December 31,
2000, to acquire a total of 220,992 shares of Virtual Communities, Inc. common
stock at exercise prices ranging from $.30 to $.65 per share. In June 1997,
Virtual Communities, Inc. issued BSC a two-year warrant, expiring December 31,
2000, to acquire 4,834 shares of Virtual Communities, Inc. common stock at an
exercise price of $.60 per share. This warrant was issued in consideration of a
30-day loan to Virtual Communities, Inc. from BSC in the amount of $50,000,
which Virtual Communities, Inc. repaid in July 1997. In September 1999, David
Morris was issued two three-year warrants to acquire up to 243,902 shares of
common stock at an exercise price of $2.10 per share in consideration of his
father's guarantee of a $500,000 line of credit to Virtual Communities, Inc.
Subsequently, in October 1999, Mr. Morris transferred 219,511 of these warrants
to BSC in consideration for BSC's agreement to cover the guarantee by Mr.
Morris' father.

In August and September 1999, VCIL increased its line of credit from Israel
General Bank by $500,000 to $560,000. The additional amount of the line is
secured by a guarantee from Conrad Morris, the father of David Morris, a
director of the Company. In consideration for providing the guarantee, Virtual
Communities, Inc. issued to David Morris two three-year warrants exercisable
into a total of 243,902 shares of common stock at an exercise price of $2.10 per
share. One warrant, for the purchase of 90,435 shares vests quarterly so that
22,609 shares vest for each quarter the guarantee remains in effect. The other
warrant, exercisable into 153,466 shares, vests on a semi-annual basis so that a
minimum of 76,733 shares are exercisable for every half-year that the guarantee
remains in effect. Virtual Communities, Inc. also agreed to pay Conrad Morris a
fee equal to two and one quarter percent (2.25%) of the amount of the line as
further consideration for his guarantee. In October 1999, Mr. Morris transferred
219,511 of the 243,902 warrants to Business Systems Consultants in consideration
for its agreement to back the guarantee of Conrad Morris.

In June 1998, Mr. Morris received a warrant exercisable until June 30, 2001 into
34,530  shares of our common stock at an exercise price of $1.00 per share in
connection with his agreement to guarantee a bank line of credit for VCIL in the
amount of $60,000 during 1997 and 1998.

In June 1997, Peter A. Jacobs, a Director of the Company, loaned VCI $50,000. In
January 1998, Mr. Jacobs converted this loan into 95,916 shares of VCI common
stock at a rate of $.60 per share. In February 1998, Mr. Jacobs loaned VCI an
additional $2,706, which amount was converted in December 1998 into 7,207 shares
of VCI common stock at the rate of $.47 per share. At the time of the loan, Mr.
Jacobs received a warrant exercisable into 3,270 shares of our common stock at
an exercise price of $.66 per share until October 31, 2000. In December 1998,
Mr. Jacobs also purchased 61,233 shares of common stock from VCI for $25,000, or
$.47 per share.

                                       54
<PAGE>

In 1996 and 1997, Net Results Holdings, LLC ("NRH") loaned to Virtual
Communities Israel, Ltd., on an interest-free basis, an aggregate of $250,000.
Harry Fox, a former director of VCI, is a 33.6% shareholder of NRH and its Chief
Executive Officer. In August 1998, VCI permitted NRH to convert the loan into
1,673,554 shares of Virtual Communities, Inc. common stock at a rate of
approximately $.17 per share. NRH and certain officers and directors of NRH own
approximately 10.1% of our outstanding capital stock.

During 1997 and 1998, Virtual Communities Israel, Ltd. ("VCIL") rented
approximately 2,500 square feet of office space and obtained administrative
services from Versaware, Ltd., an Israeli subsidiary of Versaware Technologies,
Inc. ("Versaware"). Harry Fox, a former director of VCI prior to its merger with
the Company in October 1999, is the Chairman and Chief Executive Officer, and a
31% shareholder, of Versaware. VCIL paid Versaware, Ltd. $97,000 in 1997, and
$129,000 in 1998 for this space and these services. With respect to the
Versaware arrangement:

In February 1998, VCI issued to Versaware, Ltd., a two-year warrant, expiring
February 15, 2000, subsequently extended to October 2000, to purchase 16,306
shares of common stock at an exercise price of $.66. This warrant was issued in
consideration of Versaware, Ltd.'s agreement to provide VCIL a 90-day extension
for the payment of approximately $47,000 due to Versaware, Ltd. through May 15,
1998.

In August 1998, VCI issued to Versaware, Ltd. a two-year warrant, expiring
August 24, 2000, to purchase 15,375 shares of common stock at an exercise price
of $.66 in consideration of Versaware, Ltd.'s agreement to give VCIL a 100-day
extension for the payment of approximately $75,119 due to Versaware, Ltd.
through August 24, 1998.

In December 1998, VCI issued to Versaware, Ltd. a two-year warrant, expiring
December 31, 2000, to purchase 40,882 shares of common stock at an exercise
price of $.66 in consideration of Versaware, Ltd.'s agreement to give VCIL a
125-day extension for the payment of approximately $115,000 due to Versaware,
Ltd. through from September through December 1998.

In addition, during 1997 and 1998, Virtual Communities, Inc. sublet office space
and obtained office services from NRH. Harry Fox, a former director of Virtual
Communities, Inc., is a 33.6% shareholder of NRH and our Chief Executive Officer
and a director. Pursuant to this arrangement, VCI paid NRH $9,000 during 1997,
and $19,000 during 1998. As of July 1999, VCI ceased subletting office space
from NRH.

In February 1998, VCI borrowed $50,000 from George Moskowitz, the brother of Avi
Moskowitz, our President, Chief Executive Officer and Chairman. This convertible
loan bore interest at the rate of 10% per annum. In consideration for the loan
and for a 5-month extension of the maturity date, VCI issued to George Moskowitz
a two-year warrant, expiring February 2000, which expiration date was later
extended to October 2000, to purchase 61,233 shares of common stock at an
exercise price of $.66 per share. Mr. Moskowitz exercised a portion of the
warrant exercisable into 37,878 shares in March 2000. The loan, and interest
thereon, was repaid by the VCI in January 1999. In August 1998, George Moskowitz
loaned VCI an additional $50,000. This loan bore interest at the rate of 12% per
annum and was due in September 1998. In consideration for this loan, VCI
provided George Moskowitz with $4,200 of goods and services available to VCI
through barter arrangements with our customers and agreed to issue George
Moskowitz 11,510 shares of common stock for each 30-day period the loan remained
outstanding following the maturity date. In December 1998, VCI issued to George
Moskowitz 41,955 shares of common stock in consideration of his agreement to
extend the loan through December 1998. In addition, in December 1998, Mr.
Moskowitz converted the principal and accrued interest on the loan into 128,202
shares of common stock at the rate of $.47 per share.

In connection with a private placement of securities by the Company from
December 1999 though February 2000, we received a total of $985,400 in December
1999 for the sale to Paul and Hannah Lindenblatt, the sister and brother-in-law
of Avi Moskowitz, our Chairman of the Board, President and Chief Executive
Officer, of 400,000 shares of restricted common stock and a three-year warrant,
exercisable for 40,000 shares of common stock at a purchase price of $2.46 per
share. We made the private placement offering under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). The terms of the
offering provided for issuance of the restricted common stock at a purchase
price equal to 35% below the market valuation of our publicly traded common
stock and the issuance of a warrant exercisable for the purchase of one share of
common stock for each ten shares purchased. The warrants become exercisable six
months after the date of issuance. The restricted shares of common stock and the
shares of common stock to be issued upon exercise of the warrant may be offered
for public resale only if registered under the Securities Act of 1933 or an
exemption therefrom. We have agreed to provide the

                                       55
<PAGE>

purchasers with certain registration rights with respect to the restricted
common stock and the common stock underlying the warrants.

The Lindenblatts are not involved in the management or control of the Company
nor are they otherwise affiliated with us or our management, and their
respective holdings of common stock after such purchase represent in the
aggregate approximately 5% of outstanding shares of our common stock. The sale
of the first tranche of the private placement to the purchasers was made without
regard to any familial relationship, at arms length, on the same terms and
conditions of the private placement offering to other accredited investors.

The second tranche of such private placement of securities was made in January
2000 when the Company sold 286,280 shares of restricted common stock and a
three-year warrant, exercisable into 28,628 shares of common stock at a purchase
price of $2.11 per share, to BSC.

Such registration rights commence six months from the date of purchase and if
the registration is declared effective by the Securities and Exchange
Commission, public resale of such securities shall be permitted. We paid
approximately $50,000 in financial advisory consultant fees and issued warrants
exercisable into 205,884 shares at exercise prices ranging from $2.11 to $2.46
related to the closing of the first and second tranches of the private placement
offering. The remainder of the private placement was made to non-affiliated,
accredited investors in subsequent tranches through February 2000, for aggregate
proceeds of approximately $3.5 million, including the proceeds from the sale of
the securities to the Lindenblatts and BSC. The Company issued additional
warrants exercisable into 41,058 shares of our common stock at exercise prices
ranging from $2.67 to $3.42 per share in connection with additional sales made
under the private placement. The terms and conditions of the private placement
offering were duly authorized by our Board of Directors as being reasonable and
in the best interests of the Company, with particular regard to our need for
operating capital and the limited availability of other reasonable financing
alternatives.

                                       56
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

(a)(1)   FINANCIAL STATEMENTS.

         The following financial statements are included in Part II, Item 7:


Index to Financial Statements                                          F-

Report of Independent Certified Public Accountants                     F-

Balance Sheet                                                          F-

Statement of Operations                                                F-

Statement of  Stockholders' Equity                                     F-

Statement of Cash Flows                                                F-

Notes to Financial Statements                                          F-

(a)(2)   EXHIBITS

2(1)        Agreement and Plan of Merger between Heuristic Development Group and
Virtual Communities dated June 2, 1999, as filed with the Commission as Exhibit
2.1 to Heuristic Development Group's Form 10-Q for the quarter ended on June 30,
1999, is incorporated by reference.

2(2)        Amendment to Agreement and Plan of Merger between Heuristic
Development Group and Virtual Communities, dated September 8, 1999, as filed
with the Commission as Annex L to Heuristic Development Group's Registration
Statement on Form S-4 Amendment No. 1 (File No. 333-87373), is incorporated by
reference.

2(3)        Amendment No. 2 to Agreement and Plan of Merger between Heuristic
Development Group and Virtual Communities, dated October 29, 1999, as filed with
the Commission as Exhibit 2(3) to Virtual Communities, Inc.'s Registration
Statement on Form SB-2 Amendment No. 1 filed on January 4, 2000, is incorporated
by reference.

3(1)        Certificate of Incorporation of Heuristic Development Group, as
amended, as filed with the Commission as Exhibit XI to Appendix A to Heuristic
Development Group's Registration Statement on Form S-4 Amendment No. 1 filed on
September 30, 1999 (File No. 333-87373), is incorporated by reference.

3(2)        Bylaws of Heuristic Development Group, as amended, as filed with the
Commission as Exhibit XII to Appendix A to Heuristic Development Group's
Registration Statement on Form S-4 Amendment No. 1 filed on September 30, 1999
(File No. 333-87373), is incorporated by reference.

10(1)       Software License and Support Agreement between iMediation Inc. and
Virtual Communities, dated December 30, 1999, as filed with the Commission as
Exhibit 10(1) to Virtual Communities, Inc.'s Registration Statement on Form SB-2
Amendment No. 1 filed on January 4, 2000, is incorporated by reference.

10(2)(a)    Partner Agreement between Intershop Communications, Inc. and Virtual
Communities, dated September 30, 1999, as filed with the Commission as Exhibit
10(2)(a) to Virtual Communities, Inc.'s Registration Statement on Form SB-2
Amendment No. 1 filed on January 4, 2000, is incorporated by reference.

10(2)(b)    Professional Services Agreement between Intershop Communications,
Inc. and Virtual Communities, dated September 30, 1999, as filed with the
Commission as Exhibit 10(2)(b) to Virtual Communities, Inc.'s Registration
Statement on Form SB-2 Amendment No. 1 filed on January 4, 2000, is incorporated
by reference.

10(3)    Agreement between Jewish Telegraphic Agency, Inc. and Virtual
Jerusalem, dated September, 1996, filed with the Commission as Exhibit 10(1) to
Heuristic Development Group's Registration Statement on Form S-4 on September
17, 1999 (File No. 333-87373), is incorporated by reference.

10(4)    Letter Agreement between Continental Airlines, Inc. and Virtual
Communities, Inc. dated May 18, 1999, as filed with the Commission as Exhibit
(10)2 to Heuristic

                                       57
<PAGE>

Development Group's Registration Statement on Form S-4 on September 17, 1999
(File No. 333-87373), is incorporated by reference.

10(5)    Agreement between Jewish Television Network and Virtual Jerusalem, Ltd.
dated March 23, 1997, as filed with the Commission as Exhibit 10(3) to Heuristic
Development Group's Registration Statement on Form S-4 on September 17, 1999
(File No. 333-87373), is incorporated by reference.

10(6)    Agreement between Matthew Album and Virtual Communities, Inc., dated
March 2, 1998, as filed with the Commission as Exhibit 10(4) to Heuristic
Development Group's Registration Statement on Form S-4 on September 17, 1999
(File No. 333-87373), is incorporated by reference.

10(7)    Agreement between Haaretz Daily Newspaper Ltd. and Virtual Communities,
Inc., dated July 15, 1998, as filed with the Commission as Exhibit 10(5) to
Heuristic Development Group's Registration Statement on Form S-4 on September
17, 1999 (File No. 333-87373), is incorporated by reference.

10(8)    Netgravity Adserver License Agreement between Netgravity, Inc. and
Virtual Communities dated June 30, 1999, as filed with the Commission as Exhibit
10(6) to Heuristic Development Group's Registration Statement on Form S-4 on
September 17, 1999 (File No. 33-87373), is incorporated by reference.

10(9)    Software License Agreement between Cortext Ltd. and Planet
Communications Ltd., on the one hand, and Virtual Communities, Inc., on the
other hand, dated July 16, 1999, as filed with the Commission as Exhibit 10(7)
to Heuristic Development Group's Registration Statement on Form S-4 on September
17, 1999 (File No.33-87373), is incorporated by reference.

10(10)   Web Design and Development Agreement between VCI Community Solutions,
Inc. and Tromaville.com, Inc., dated August 6, 1999, as filed with the
Commission as Exhibit 10(8) to Heuristic Development Group's Registration
Statement on Form S-4 on September 17, 1999 (File No. 333-87373), is
incorporated by reference.

10(11)   Frontier Global Center, Inc. Master Service Agreement between Frontier
GlobalCenter, Inc. and Virtual Communities dated March 15, 1998, as filed with
the Commission as Exhibit 10(9) to Heuristic Development Group's Registration
Statement on Form S-4 on September 17, 1999 (File No. 333-87373), is
incorporated by reference.

10(12)   Financial Services Agreement between Virtual Communities, Inc. and
Virtual Communities Israel, Ltd. dated September 1, 1999, as filed with the
Commission as Exhibit 10(10) to Heuristic Development Group's Registration
Statement on Form S-4 on September 17, 1999 (File No. 333-87373), is
incorporated by reference.

10(13)   Cost Plus Agreement between Virtual Communities, Inc. and Virtual
Communities Israel, Ltd. dated September 1, 1999, as filed with the Commission
as Exhibit 10(11) to Heuristic Development Group's Registration Statement on
Form S-4 on September 17, 1999 (File No. 333-87373), is incorporated by
reference.

10(14)   Lease Agreement between Allied Investments Ltd., as Lessor, and Virtual
Jerusalem, as Lessee, dated December 29, 1998, as filed with the Commission as
Exhibit 10(12) to Heuristic Development Group's Registration Statement on Form
S-4 on September 17, 1999 (File No. 333-87373), is incorporated by reference.

10(15)   Letter Guarantee to Allied Investments from Israel General Bank Ltd.
dated December 23, 1998, as filed with the Commission as Exhibit 10(13) to
Heuristic Development Group's Registration Statement on Form S-4 on September
17, 1999 (File No. 333-87373), is incorporated by reference.

10(16)   Lease Agreement between J.T.P. The Jerusalem Technology Park Ltd., as
Lessor, and Virtual Communities Israel, Ltd., as Lessee, dated May 19, 1999, as
filed with the Commission as Exhibit 10(14) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No. 333-87373),
is incorporated by reference.

10(17)   Letter Guarantee to J.T.P. The Jerusalem Technology Park Ltd. from
Israel General Bank Ltd. dated August 16, 1999, as filed with the Commission as
Exhibit 10(15) to Heuristic Development Group's Registration Statement on Form
S-4 on September 17, 1999 (File No. 333-87373), is incorporated by reference.

10(18)   Lease Agreement between Eighth Avenue Loft Associates and Virtual
Communities, Inc. dated June 14, 1999, as filed with the Commission as Exhibit
10(16) to Heuristic

                                       58
<PAGE>

Development Group's Registration Statement on Form S-4 on September 17, 1999
(File No. 333-87373), is incorporated by reference.

10(19)    Employment Agreement between Deborah Gaines and Virtual Communities,
dated October 25, 1999, as filed with the Commission as Exhibit 10(19) to
Virtual Communities, Inc.'s Registration Statement on Form SB-2 Amendment No. 1
filed on January 4, 2000, is incorporated by reference.

10(20)    Employment Agreement between Avi Moskowitz and Virtual Communities,
Inc. dated June 1, 1999, as filed with the Commission as Exhibit 10(17) to
Heuristic Development Group's Registration Statement on Form S-4 on September
17, 1999 (File No. 333-87373), is incorporated by reference.

10(21)    Employment Agreement between Michael Harwayne and Virtual Communities,
Inc. dated February, 1999, as filed with the Commission as Exhibit 10(18) to
Heuristic Development Group's Registration Statement on Form S-4 on September
17, 1999 (File No. 333-87373), is incorporated by reference.

10(22)    Employment Agreement between Mark McCourt and Virtual Communities,
Inc. dated February, 1999, as filed with the Commission as Exhibit 10(19) to
Heuristic Development Group's Registration Statement on Form S-4 on September
17, 1999 (File No. 333-87373), is incorporated by reference.

10(23)    Warrant to Purchase Shares of Common Stock of Virtual Communities,
Inc. No. W-15, between Virtual Communities and Avi Moskowitz dated December 31,
1998, as filed with the Commission as Exhibit 10(20) to Heuristic Development
Group's Registration Statement on Form S-4 on September 17, 1999 (File No. 333-
87373), is incorporated by reference.

10(24)    Warrant to Purchase Shares of Common Stock of Virtual Communities,
Inc. No. W-17, between Virtual Communities and Avi Moskowitz dated June, 1998,
as filed with the Commission as Exhibit 10(21) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No. 333-87373),
is incorporated by reference.

10(25)    Warrants to Purchase Shares of Common Stock of Virtual Communities,
Inc. Nos. W-14, W-25 and W-26 between Virtual Communities and David Morris dated
June, 1998, as filed with the  Commission as Exhibit 10(22) to Heuristic
Development Group's Registration Statement on Form S-4 on September 17, 1999
(File No. 333-87373), is incorporated by reference.

10(26)     1997 Stock Option Plan of Virtual Communities, as filed with the
Commission as Exhibit 10(23) to Heuristic Development Group's Registration
Statement on Form S-4 on September 17, 1999 (File No. 333-87373), is
incorporated by reference.

10(27)     1998 Stock Option Plan of Virtual Communities, as filed with the
Commission as Exhibit 10(24) to Heuristic Development Group's Registration
Statement on Form S-4 on September 17, 1999 (File No. 333-87373), is
incorporated by reference.

10(28)     1999 Stock Option Plan of Virtual Communities, as filed with the
Commission as Exhibit 10(25) to Heuristic Development Group's Registration
Statement on Form S-4 on September 17, 1999 (File No. 333-87373), is
incorporated by reference.

10(29)    1996 Stock Option Plan of Heuristic Development Group, as filed with
the Commission as Exhibit 10.1 to Heuristic Development Group's Registration
Statement on Form SB-2 filed on December 11, 1996 (File No. 333-17635), is
incorporated by reference.

10(30)    Escrow Agreement among Heuristic Development Group, American Stock
Transfer & Trust Company, and shareholders of Heuristic Development Group, , as
filed with the Commission as Exhibit 10.2 to Heuristic Development Group's
Registration Statement on Form SB-2 filed on December 11, 1996 (File No. 333-
17635), is incorporated by reference.

10(31)    Form of Indemnification Agreement, as filed with the Commission as
Exhibit 10.3 to Heuristic Development Group's Registration Statement on Form SB-
2 filed on December 11, 1996 (File No. 333-17635), is incorporated by reference.

10(32)    Assignment dated August 22, 1994 between Nautilus Group Japan, Ltd.
and Heuristic Development Group, as filed with the Commission as Exhibit 10.4 to
Heuristic Development Group's Registration Statement on Form SB-2 filed on
December 11, 1996 (File No. 333-17635), is incorporated by reference.

10(33)    Exclusive Distribution License Agreement dated June 1995 between
Nautilus Group Japan, Ltd. and Heuristic Development Group, as filed with the
Commission as Exhibit 10.5

                                       59
<PAGE>

to Heuristic Development Group's Registration Statement on Form SB-2 filed on
December 11, 1996 (File No. 333-17635), is incorporated by reference.

10(34)     Letter Agreement dated November 27, 1996 between Nautilus Group
Japan, Ltd. and Heuristic Development Group, as filed with the Commission as
Exhibit 10.6 to Heuristic Development Group's Registration Statement on Form SB-
2 filed on December 11, 1996 File No. 333-17635), is incorporated by reference.

10(35)     Office Lease dated August 1, 1996 between Paulistic Productions and
Heuristic Development Group, as filed with the Commission as Exhibit 10.7 to
Heuristic Development Group's Registration Statement on Form SB-2 filed on
December 11, 1996 (File No. 333-17635), is incorporated by reference.

10(36)     Retainer Agreement dated August 16, 1994 between TransPac Software
and Heuristic Development Group, as filed with the Commission as Exhibit 10.8 to
Heuristic Development Group's Registration Statement on Form SB-2 filed on
December 11, 1996 (File No. 333-17635), is incorporated by reference.

10(37)     Employment Agreement dated as of December 1, 1996 between Heuristic
Development and Steven R. Gumins, as filed with the Commission as Exhibit 10.9
to Heuristic Development Group's Registration Statement on Form SB-2 filed on
December 11, 1996 (File No. 333-17635), is incorporated by reference.

10(38)     Employment Agreement dated as of December 1, 1996 between Heuristic
Development Group and Deborah E. Griffin, as filed with the Commission as
Exhibit 10.10 to Heuristic Development Group's Registration Statement on Form
SB-2 filed on December 11, 1996 (File No. 333-17635), is incorporated by
reference.

10(39)     Conversion Agreement between Heuristic Development Group and holders
of Indebtedness, as filed with the Commission as Exhibits 10.11 and 10.12 to
Heuristic Development Group's Registration Statement on Form SB-2 filed on
December 11, 1996 (File No. 333-17635), is incorporated by reference.

21(1)      List of Subsidiaries, as filed with the Commission as Exhibit 21(1)
to Virtual Communities, Inc.'s Registration Statement on Form SB-2 Amendment No.
1 filed on January 4, 2000, is incorporated by reference.

23(1)      Consent of Arthur Andersen, LLP.

3.1 Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement on Form SB-2 (No. 333-17635))

3.2 By-laws of the Registrant (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form SB-2 (No. 333-17635))

4.1 Bridge Note Agreement (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form SB-2 (No. 333-17635))

4.2 Bridge Warrant Agreement (Incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form SB-2 (No. 333-17635))

4.3 Warrant Agreement (Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form SB-2 (No. 333-17635))

10.1 1996 Stock Option Plan. (Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form SB-2 (No. 333-17635))

10.2 Form of Escrow Agreement by and between the Registrant, American Stock
Transfer & Trust Company and certain security holders of the Registrant.
(Incorporated by reference to Exhibit 10.2 to the Company's Registration
Statement on Form SB-2 (No. 333-17635))

10.3 Assignment dated August 22, 1994 between Nautilus Group Japan, Ltd. and the
Company. (Incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form SB-2 (No. 333-17635))

10.4 Exclusive Distribution License Agreement dated June 1995 between Nautilus
Group Japan, Ltd. and the Company. (Incorporated by reference to Exhibit 10.5 to
the Company's Registration Statement on Form SB-2 (No. 333-17635))

                                       60
<PAGE>

10.5 Letter Agreement dated November 27, 1996 between Nautilus Group Japan, Ltd.
and the Company. (Incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form SB-2 (No. 333-17635))

10.6 Retainer Agreement dated August 16, 1994 between TransPac Software Inc. and
the Company. (Incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form SB-2 (No. 333-17635))

10.7 Conversion Agreement between the Company and Nautilus Group Japan, Ltd.
(Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form SB-2 (No. 333-17635))

23.1 Consent of Arthur Andersen LLP

27.0 Financial Data Schedule


* Incorporated by Reference to the Company's Registration Statement on Form SB-
2, No.

(b)   REPORTS ON FORM 8-K

The Company filed the following reports on Form 8-K during the fourth quarter of
fiscal 1999.

Form 8-K dated November 12, 1999 related to the merger between the HDG
Acquisition Sub Inc., a wholly owned subsidiary of the Company with an into
Virtual Communities, Inc.

Amended 8-K/A filed November 17, 1999 related to the resignation of the
Company's auditors in connection with the merger.

Form 8-K filed December 13, 1999 related to the private placement of securities
by the Company.

                                       61
<PAGE>

                           VIRTUAL COMMUNITIES, INC.
                                AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS
                            as of December 31, 1999
                            -----------------------




<PAGE>

                           VIRTUAL COMMUNITIES, INC.
                                AND SUBSIDIARIES

                                    Contents
                                    --------


                                                                      Page
                                                                      ----


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                               F-2

CONSOLIDATED FINANCIAL STATEMENTS

 Consolidated Balance Sheet                                            F-3

 Consolidated Statements of Operations                                 F-4

 Consolidated Statements of Changes in Shareholders' Deficiency        F-5

 Consolidated Statement of Cash Flows                                  F-6

 Notes to the Consolidated Financial Statements                      F-7 - F-25



                           #   #   #   #   #   #   #
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
Virtual Communities, Inc.
-------------------------

We have audited the accompanying consolidated balance sheet of Virtual
Communities, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1999, and the related consolidated statements of operations, changes in
shareholders' deficiency and cash flows for each of the two years ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Virtual Communities, Inc. and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for each of the two years ended December 31, 1999 in conformity
with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1B to
the consolidated financial statements, the Company is has suffered recurring net
losses from operations and has a shareholder deficiency. Accordingly, the
Company is dependent on obtaining additional sources to finance its operations.
These matters raise substantial doubt about the Company ability to continue as a
going concern. Management's plans in regard to these matters and financings
completed subsequent to the balance sheet date are also described in Note 1B.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that might result
should the Company be unable to continue as a going concern.


                                             Arthur Andersen LLP

New York, New York
April 14, 2000

                                      F-2
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
               (U.S. Dollars in thousands except per share data)

                                                                    December 31
                                                                       1999
                                                                       ----
ASSETS
Current Assets
Cash and cash equivalents                                             $  469
Trade receivables, net of allowance for doubtful debts of $23            191
Other receivables                                                        128
                                                                   ----------
  Total current assets                                                   788

Property and Equipment, net of accumulated depreciation and
 amortization                                                          1,150

Severance Pay Deposits                                                    83

Other Assets                                                             343
                                                                   ----------

   Total Assets                                                       $2,364
                                                                   ----------

LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities
 Short-term bank borrowings and current maturities of long-term loan  $  731
 Shareholders' loans                                                     150
 Accounts payables and accrued expenses                                1,511
                                                                   ----------
   Total current liabilities                                           2,392

Long-Term Liabilities
 Long-term loan                                                          167
 Accrued severance pay                                                   329
                                                                   ----------
   Total long-term liabilities                                           496
                                                                   ----------
   Total liabilities                                                   2,888
                                                                   ----------

Commitments and contingencies (Note 9)

Shareholders' Deficiency
 Preferred stock of $0.01 par value
  Authorized - 5,000,000 shares; none issued and outstanding             --
 Common stock of $0.01 par value
  Authorized - 45,000,000 shares; issued and outstanding -
  14,630,224 shares                                                      146
 Additional paid-in capital                                            8,336
 Accumulated deficit                                                  (8,856)
                                                                   ----------
                                                                        (374)
 Treasury stock 149,900 shares at cost                                  (150)
                                                                   ----------
   Total shareholders' deficiency                                       (524)
                                                                   ----------

   Total liabilities and shareholders' deficiency                     $2,364
                                                                   ==========


    The accompanying notes form an intergal part of the financial statements

                                      F-3
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
               (U.S. Dollars in thousands except per share data)


                                                          For the year ended
                                                              December 31
                                                              -----------
                                                           1999          1998
                                                           ----          ----

REVENUES                                                 $   857        $   819
                                                       ----------     ---------

OPERATING COST AND EXPENSES

 Cost of revenues                                          1,816            721

 Selling and marketing expenses                            1,583            469

 General and administrative expenses                       2,222            872

 Merger costs                                              1,057             --
                                                       ----------     ---------
   Total operating costs and expenses                      6,678          2,062
                                                       ----------     ---------

   Operating loss                                         (5,821)        (1,243)

 Financing expenses, net                                     109            191
                                                       ----------     ---------
   Net loss                                              $(5,930)       $(1,434)
                                                       ==========     =========
NET LOSS PER SHARE, BASIC AND DILUTED                    $ (0.56)       $ (0.17)
                                                       ==========     =========

WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES OUTSTANDING,
  BASIC AND DILUTED                                    10,532,530     8,485,904
                                                       ==========     =========

    The accompanying notes form an intergal part of the financial statements

                                      F-4
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF CHANGES
                          IN SHAREHOLDERS' DEFICIENCY
               (U.S. Dollars in thousands except per share data)

<TABLE>
<CAPTION>


                         Number of   Number of      Common stock      Additional    Accumulated   Treasury    Total
                          Series A    Series B      ------------        paid-in       deficit       stock
                         preferred   preferred     Shares    Amount     capital
                           shares      shares
                         ----------  ----------   --------  --------  ----------     ----------  ----------  -------

<S>                      <C>         <C>         <C>         <C>     <C>            <C>           <C>        <C>
Balance as of
  January 1, 1998                -           -    4,354,588    $ 44      $  604       $(1,492)    $    -   $  (844)

Common stock issued              -           -    2,256,383      22         827             -          -       849

Common stock issued
 upon conversion of
 loans                           -           -    3,087,008      31         554                                585

Options issued                   -           -            -       -          72             -          -        72

Net loss                         -           -            -       -           -        (1,434)         -    (1,434)
                         ---------    --------   ----------    ----      ------       -------      -----   -------

Balance as of
  December 31, 1998              -           -    9,697,979    $ 97      $2,057       $(2,926)    $    -   $  (772)

Common stock issued              -           -      529,519       5       1,067             -          -     1,072

Series A preferred
 stock issued upon
 conversion of
 convertible loans           5,000           -            -       -         500             -          -       500

Series A preferred
 stock issued, net of
 issuance costs              9,550           -            -       -         815             -          -       815

Series B preferred
 stock issued, net of
 issuance costs                  -      10,325            -       -         874             -          -       874

Common stock issued
 upon conversion of
 Series A and B
 preferred stock           (14,550)    (10,325)   2,645,770      26         (26)            -          -         -

Common stock issued
 upon the Merger                 -           -    1,751,956      18       2,777             -       (150)    2,645

Warrants issued                  -           -            -       -         268             -          -       268

Common stock issued
  upon exercise of
  warrants                       -           -        5,000       -           4             -          -         4

Net loss                         -           -            -       -           -        (5,930)         -    (5,930)
                         ---------    --------   ----------    ----      ------       -------      -----   -------

Balance as of
 December 31, 1999               -           -   14,630,224    $146      $8,336       $(8,856)     $(150)  $  (524)
                        ==========  ==========   ==========    ====      ======       =======      =====   =======
</TABLE>

    The accompanying notes form an intergal part of the financial statements

                                      F-5
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
               (U.S. Dollars in thousands except per share data)


                                                            For the year ended
                                                                 December 31
                                                                 -----------
                                                              1999        1998
                                                              ----        ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                    $(5,930)   $(1,434)
Adjustments to reconcile net loss to net cash
 used in operating activities (see below)                     1,284        274
                                                              -----      -----
  Net cash used in operating activities                      (4,646)    (1,160)
                                                              -----      -----

CASH FLOWS FROM INVESTING ACTIVITIES
 Purchase of fixed assets                                      (962)       (77)
 Investment in other assets                                    (293)        --
                                                              -----      -----
   Net cash used in investing activities                     (1,255)       (77)
                                                              -----      -----

CASH FLOWS FROM FINANCING ACTIVITIES
 Short-term bank borrowings, net                                583         32
 Receipt of shareholders' loans                                 150        200
 Repayment of shareholders' loans                              (200)        --
 Receipt (repayment) of convertible loans                       (75)       624
 Issuance of shares                                           2,765        921
 Cash acquired in the Merger                                  2,573         --
                                                              -----      -----
  Net cash provided by financing activities                   5,796      1,777
                                                              -----      -----

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS               (105)       540
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                  574         34
                                                              -----      -----
CASH AND CASH EQUIVALENTS AT END OF YEAR                     $  469      $ 574
                                                             ======      =====

ADJUSTMENT TO RECONCILE NET LOSS TO NET CASH USED IN
  OPERATING ACTIVITIES:
   Items not affecting operating cash flows:
    Depreciation and other                                   $  207      $  78
    Accrued severance pay, net                                  203         14
    Issuance of warrants                                        268         --
   Changes in operating assets and liabilities:
    Increase in trade receivables, net                          (52)       (19)
    Increase in other receivables                               (66)       (21)
    Increase in payables and accrued expenses                   724        222
                                                              -----      -----
                                                             $1,284      $ 274
                                                             ======      =====
SUPPLEMENT DISCLOSURES OF CASH FLOW INFORMATION:

CASH PAID FOR INTEREST                                       $   31      $  23
                                                              =====      =====
NONCASH TRANSACTIONS
 Issuance of shares upon conversions of loans                $  500      $ 585
                                                              =====      =====
 Purchased of fixed assets on credit                         $  214      $  --
                                                              =====      =====


    The accompanying notes form an intergal part of the financial statements

                                      F-6
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (U.S. Dollars in thousands except per share data)

Note 1  -  GENERAL

        A.  Virtual Communities, Inc. (the "Company"), a Delaware corporation,
            is the product of a merger consummated October 29, 1999 (the
            "Merger"), in which Virtual Communities, Inc. ("VCI") merged with
            and into a wholly-owned subsidiary of Heuristic Development Group,
            Inc. ("HDG").  Prior to the Merger, HDG was a development stage
            company organized to research, develop, design and market fitness-
            related products.  VCI was incorporated in 1996 to develop, acquire
            and operate online communities on the Web that aggregate and publish
            various news, media and entertainment content targeted to specific
            ethnic groups.  VCI commenced its operation in June 1997.  After the
            Merger, HDG's name was changed to Virtual Communities, Inc. to
            reflect that the Company's primary business is the development and
            operation of online communities and related services for third
            parties and the publishing of its own communities.  The Company
            believes it currently operates in one business segment.

            As a result of the Merger, VCI shareholders received 1.151 shares of
            HDG common stock for each share of VCI common stock held by them.
            HDG's Board of Directors and management resigned and were replaced
            with VCI's Board of Directors and management. Following the Merger,
            VCI shareholders held 88.6% of the common stock of the Company with
            HDG shareholders holding the remaining 11.4%. In connection with the
            Merger, HDG began trading its securities (former symbol: IFIT) on
            the NASDAQ Small Cap Market under the symbols: "VCIX" - for the
            common stock, "VCIXU" for the Units, "VCIXW" for the Class A
            Warrants and "VCIXZ" for the Class B warrants.

            For accounting purposes, the acquisition has been treated as a
            recapitalization of VCI with VCI as the acquirer (reverse
            acquisition). The historical financial statements prior to October
            29, 1999, are those of VCI and as of October 29, 1999 the financial
            statements reflect the two companies. The results of operation of
            HDG for the period January 1, 1999 to October 29, 1999 are as
            follows:

            Selling, marketing and general
                and administrative expenses                     $ 589
            Merger costs                                          140
            Financing income, net                                (137)
                                                                 ----
            Net loss                                            $ 592
                                                                =====

                                      F-7
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 1   -  GENERAL (Cont.)

        A.  (Cont.)

            The historical financial statements of VCI are presented with no
            change except for the retroactive restatement of number of shares
            and earnings per share data, based on the exchange ratio of shares
            issued in the Merger.

            Prior to the Merger, in June 1997, VCI acquired the majority of the
            net assets and shares of Virtual Communities Israel Ltd. ("VCIL" -
            formerly Virtual Jerusalem Ltd.), an Israeli company. VCIL commenced
            operations in January 1996.  VCIL develops and maintains the
            Company's online communities and performs certain programming,
            design, software development and web maintenance services on behalf
            of the Company pursuant to a Cost Plus Agreement, and certain
            general and administrative duties on behalf of the Company and
            pursuant to a Financial Services Agreement between the entities.

            The Company markets and sells its online community design,
            development and Web maintenance services to web site publishers
            through VCI Community Solutions, Inc., a wholly-owned subsidiary
            established by VCI in August 1999. These services include the
            Company's proprietary Community Management Solution ("CMS"), a
            turnkey solution for the creation of online communities that
            includes content management and publishing software, e-commerce
            functionality and a comprehensive set of community retention
            features designed to attract and retain visitors to a community. The
            Company provides several of its CMS features through license
            arrangements with third party service providers and by developing
            its own programming tools. As of December 31, 1999 the Company
            entered into one agreement for its CMS system.

                                      F-8
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 1   -  GENERAL (Cont.)

        A.  (Cont.)

            The Company's online communities are targeted to members of
            demographic groups with interests in their historical ethnic
            backgrounds and who want to share information with other members
            with same interests. The Company currently operates five online
            communities that it owns outright: Virtual Jerusalem
            (www.virtualjerusalem.com), a leading Internet site containing
            Jewish and Israel related content that has been in operation since
            1996, Virtual HolyLand (www.virtualholyland.com), targeted to the
            Evangelical Christian community and launched in late 1998, and
            Virtual Ireland (www.virtualireland.com), Virtual Italy
            (www.virtualitaly.com) and Virtual India (www.virtualindia.com)
            which were developed by VCI and launched in 1999. The Company has
            agreements with content partners and third party service providers
            who provide these communities with content and features such as chat
            rooms, message boards, weather and e-commerce capabilities. The
            Company also owns and publishes a web site called "Israel Wire"
            which provides online news from Israel through an Israeli
            subsidiary, VCI Internet Properties Ltd. which it formed in June
            1998.

        B.  The Company incurred net losses in 1999 amounting approximately to
            $5.9 million and anticipates that it will continue to incur losses
            for some time. The Company's continued existence is dependent on its
            ability to generate more revenues and on obtaining additional
            financing from its shareholders and external sources. Subsequent to
            the balance sheet date, the Company entered into several private
            placements selling an aggregate of 1,499,664 shares of common stock
            for aggregate proceeds of $5,524 to accredited investors at prices
            ranging from $2.11 to $5.80 per share. In connection with these
            sales, the Company issued warrants exercisable into an aggregate of
            2,821,266 shares of common stock at exercise prices ranging from
            $2.11 to $18.00 (See Note 12B and 12C). Management expects the
            proceeds from these private placements and the proceeds from the
            expected exercise of the warrants to be sufficient to finance the
            Company's operations through December 31, 2000. However, there can
            be no assurance that the Company will obtain all the financing
            necessary for its operations. These matters raise substantial doubt
            about the Company's ability to continue as a going concern. The
            accompanying consolidated financial statements do not include any
            adjustments that might be necessary should the Company be unable to
            continue as a going concern.

                                      F-9
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 2   -  ACCOUNTING POLICIES

        The consolidated financial statements have been prepared in conformity
        with generally accepted accounting principles. The significant
        accounting policies followed in the preparation of the financial
        statements, applied on a consistent basis, are as follows:

        A.  PRINCIPLES OF CONSOLIDATION

            The consolidated financial statements include the accounts of VCI
            and its wholly-owned subsidiaries. All material intercompany
            accounts and transactions have been eliminated in consolidation.

        B.  USE OF ESTIMATES

            The preparation of the consolidated financial statements in
            conformity with generally accepted accounting principles requires
            management to make estimates and assumptions that affect the
            reported amounts of assets and liabilities and disclosures of
            contingent assets and liabilities at the dates of the consolidated
            financial statements and the reported amounts of revenue and
            expenses during the reporting periods. Actual results may differ
            from those estimates.

        C.  CASH AND CASH EQUIVALENTS

            All highly liquid investments with an original maturity of three
            months or less are considered cash equivalents.

        D.  PROPERTY AND EQUIPMENT

            Property and equipment are stated at cost, net of accumulated
            depreciation and amortization. Depreciation and amortization is
            calculated using the straight-line method over the estimated useful
            lives of the assets ranging as follows:

                                                              Years
                                                              -----

            Computers                                         3 - 4
            Furniture and office equipment                    7 - 14

                                     F-10
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 2   -  ACCOUNTING POLICIES (Cont.)

        E.  INCOME TAXES

            The Company adopted SFAS No. 109, "Accounting for Income Taxes".
            Under SFAS No. 109, deferred tax assets and liabilities are
            recognized for the future tax consequence attributable to
            differences between the financial statement carrying amounts of
            existing assets and liabilities and their tax bases. Deferred tax
            assets and liabilities are measured using enacted tax rates expected
            to apply to taxable. Income in the years in which those temporary
            differences are expected to be recovered or settled. The effect on
            deferred tax assets or liabilities of a change in tax rates is
            recognized in the period in which the tax change occurs. Valuation
            allowances are established, when necessary, to reduce deferred tax
            assets amounts expected to be realized.

        F.  REVENUE RECOGNITION

            The Company's primary source of revenue to date has been from online
            Web site advertising fees. The Company recognizes revenues earned
            from advertising fees ratably over the term of the advertising
            contract. The Company also earns revenues from hosting and exposure
            of content partner owned Web sites, and from site production
            services. Hosting and exposure revenues are recognized ratably over
            the service period (mainly one year). Revenues from production
            services are recognized upon completion of such services and
            acceptance by client.

            Revenues from sales of software products and technology are
            recognized in accordance with Statement of Position (SOP) 97-2, as
            amended by SOP 98-4 and SOP 98-9, upon delivery, when collection is
            probable, the vendor's fee is fixed or determinable, vendor-specific
            objective evidence exists to allocate the total fee to the elements
            of the arrangement and persuasive evidence of an arrangement exists.
            Provided that all other elements of SOP 97-2 are met, revenues are
            recognized upon delivery, whether the customer is a distributor or
            the final end user. Revenues for maintenance and support services
            are deferred and recognized ratably over the service period.

                                     F-11
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 2   -  ACCOUNTING POLICIES (Cont.)

        G.  BARTER ARRANGEMENTS

            The Company enters into barter arrangements with certain customers,
            whereby the Company's advertising, hosting and exposure or
            production services are exchanged for goods or services such as
            airline tickets, content material and promotional services.

            Revenues and expenses from barter transactions are measured on the
            basis of the fair value of the goods or services sold or, if more
            clearly evident, the fair value of the assets or services
            received.Advertising barter revenues are determined by the fair
            market value of the goods or services received based on the
            respective customer's listed prices.The fair value of barter hosting
            and exposure revenues and production services is determined by the
            standard rates charged to cash buyers.

            The Company's revenues from barter transactions for the year ended
            December 31, 1999 and 1998 was $203 and $279, respectively. (See
            Note to N)

            Barter expenses are included in selling, marketing, general and
            administrative expenses section of the statements of operations, as
            incurred.

        H.  COST OF REVENUES

            Cost of revenues consists primarily of direct labor costs and
            content material and licenses.


                                     F-12
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 2   -  ACCOUNTING POLICIES (Cont.)

        I.  LONG-LIVED ASSETS

            The Company records its long-lived assets at costs. In accordance
            with Statement of Financial Accounting Standards ("SFAS") No. 121.
            "Accounting for the Impairment of Long-Lived Assets and for Long-
            Lived Assets to Be Disposed Of," the Company reviews its long-lived
            assets for impairment whenever events or changes in circumstances
            indicate that the carrying amounts of the assets may not be
            recoverable. Furthermore, the assets are evaluated for continuing
            value and proper useful lives by comparison to expected future cash
            projections. Management has performed a review of all long-lived
            assets and has determined that no impairment of the respective
            carrying values has occurred as of December 31, 1999.

        J.  LOSS PER SHARE

            The Company adopted the provision of SFAS No. 128, "Earnings per
            Share", which establishes new standards for computing and presenting
            earnings per share ("EPS"). The new standard requires the
            presentation of basic EPS and diluted EPS. Basic EPS is calculated
            by dividing income available to common shareholders by the weighted
            average numbers of shares of common stock outstanding during the
            period. Diluted EPS is calculated by dividing income available to
            common shareholders by the weighted average number of common shares
            outstanding adjusted to reflect potentially dilative securities. All
            outstanding options and warrants have been excluded from the
            calculation of diluted EPS, as they would be antidilutive.

        K.  FAIR VALUE OF FINANCIAL INSTRUMENTS

            The carrying amounts of cash and cash equivalent, accounts,
            receivable, accounts payable and bank loans approximate fair value,
            due to the short-term maturity of these instruments. The carrying
            amount of long-term loan approximates fair value.

                                     F-13
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 2   -  ACCOUNTING POLICIES (Cont.)

        L.  STOCK BASED COMPENSATION

            The Company adopted the provisions of SFAS No. 123, "Accounting for
            Stock-Based Compensation", and elected to continue the accounting
            set forth in Accounting Policy Board No. 25, "Accounting for Stock
            Issued to Employees" ("APB No. 25"), and to provide the necessary
            pro forma disclosures as if the fair value method has been applied.

        M.  CONCENTRATION

            For the year ended December 31, 1999, the Company has 2 customers
            which represent 22% and 19% of total revenues. For the year ended
            December 31, 1998 the Company has 1 customer which represents 16% of
            total revenues.

        N.  NEW ACCOUNTING PROUNCEMENTS

            In January 2000, the Emerging Issues Task Force (the "EITF") reached
            a consensus on EITF Issue 99-17, "Accounting for Advertising Barter
            Transactions." The EITF agreed that advertising barter transactions
            entered into after January 20, 2000 should be accounted for at fair
            value on a one-for-one basis with revenue from similar advertising
            sold in a cash transaction that occurred in the preceding six months
            with comparable terms, such as length of program, cost and type of
            advertisement. A cash transaction may be used only once as the basis
            for providing fair value evidence for a barter transaction. As a
            result, revenue from barter is effectively limited to no more than
            50% of total revenue per year. EITF 99-17 is applicable only to
            transactions entered into after January 20, 2000. The Company has
            adopted EITF 99-17 effective January 1, 2000. As a result, the
            Company also anticipates that its future reported barter revenue
            will decrease as a percentage of total revenue. On a pro forma
            basis, the Company's barter revenue would have been approximately
            $157 for the year ended December 31, 1999 had EITF 99-17 been
            applicable for such period.

            In June 1998, the FASB issued Statement of Financial Accounting
            Standards No. 133, Accounting for Derivative Instruments and Hedging
            Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and
            reporting standards for derivative instruments, including certain
            derivative instruments embedded in other contracts, and for hedging
            activities. It requires that an entity recognize all derivatives as
            either assets or liabilities on the balance sheet at their fair
            value. SFAS No. 133 was subsequently amended by SFAS No. 137, which
            deferred the effective date of SFAS No. 133 to fiscal years
            beginning after June 15, 2000. The Company currently does not use
            derivatives and therefore this new pronouncement is not applicable.

                                     F-14
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 2   -  ACCOUNTING POLICIES (Cont.)

        N.  NEW ACCOUNTING PROUNCEMENTS (Cont.)

            In December 1999, the SEC issued SAB No. 101, "Revenue Recognition
            in Financial Statements". SAB 101 expresses the views of the SEC
            staff in applying generally accepted accounting principles to
            certain revenue recognition issues. The Company has concluded that
            the implementation of this SAB will not have a material impact on
            its financial position or its results of operations.


Note 3   -  PROPERTY AND EQUIPMENT, NET

                                                            December 31
                                                               1999
                                                               ----

            Computers                                         $1,355
            Furniture and office equipment                        92
                                                               -----
                                                               1,447
            Less - accumulated depreciation                      297
                                                               -----
            Net book value                                    $1,150
                                                              ======

            Depreciation expenses amount to $207 and $78 for the year ended
            December 31, 1999 and 1998, respectively.


Note 4   -  SHORT-TERM BANK BORROWINGS AND CURRENT MATURITIES OF LONG-TERM LOAN

                                                            December 31
                                                               1999
                                                               ----

            Bank overdrafts                                   $  285
            Bank loans                                           399
            Current maturities of long-term loan                  47
                                                               -----
                                                              $  731
                                                              ======

            Bank overdrafts (in New Israeli Shekels) bear interest of
            approximately 16% per annum. Bank loans (in U.S.$) bear interest of
            approximately 7.6% and Libor + 2.0% per annum (approximately 8.2% at
            December 31, 1999).

                                     F-15
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 5   -  SHORT TERM SHAREHOLDERS LOANS

            In January 1999, the Company received a six month, interest-free
            loan in the principal amount of $150 from a shareholder of the
            Company. The loan incurred interest at the rate of 10% per annum
            commencing July 1999. The lender was entitled to convert all or a
            portion of the loan into common stock of the Company at a rate of
            $0.58 per share, which approximated fair market value at that date,
            until such time as the Company repays the loan, provided, however,
            that the Company's investment bankers agree to such conversion.

            Subsequent to balance sheet date the loan was converted into 297,672
            shares of common stock after giving effect to the Merger exchange
            rate of 1.151.


Note 6   -  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                                             December 31
                                                                1999
                                                                ----

            Accounts payable                                  $  979
            Accrued payroll and related costs                    251
            Accrued expenses                                     201
            Deferred revenues                                     80
                                                              $1,511


Note 7   -  LONG TERM LOAN

            The Company's facilities in Israel are leased under a 3 year lease
            agreement. The lessor of the facilities has incurred building
            improvements costs, of which $234 the Company's subsidiary is
            obligated to pay back over the term of the lease. As of December 31,
            1999, this obligation amounts to $214, of which $167 is classified
            as long term.

Note 8   -  ACCRUED SEVERANCE PAY

            The Company's obligation for severance pay to employees in Israel is
            partially covered by payments to insurance companies. The accrual
            for severance pay and deposits with insurance companies in respect
            of severance pay are included in the balance sheet.

                                     F-16
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 9   -  COMMITMENTS AND CONTINGENCIES

            Leases
            ------

            The Company and its subsidiaries lease certain facilities under
            operating leases expiring in various years through 2005. Future
            minimum payments due under these leases are as follows:

            Year ending December 31,
            ------------------------

            2000                                              $  524
            2001                                                 595
            2002                                                 533
            2003                                                 229
            2004                                                 233
            Thereafter                                            58
                                                              ------
            Total                                             $2,172
                                                              ======

            Of this amount, a lease commitment of a subsidiary in the amount of
            $867 is linked to the Israeli Consumer Price Index.

            Lease expenses amount to $214 and $122 for the year ended December
            31, 1999 and 1998, respectively.

            Legal Proceedings
            -----------------

            Certain shareholders, who held some of VCI Series B Preferred Stock
            prior to the Merger, have notified the Company that they believe
            that they are entitled to additional shares Common Stock and that
            they intend to commence an action in connection with such claims.
            They contend that the reset price for the conversion of the former
            Series B Preferred shares to the Common Stock of the Company
            pursuant to the Merger agreement should have been $1.45 rather than
            the $2.10 used by the Company. While the holders thereof have not
            filed a suit to date, their claim amounts to approximately 170,000
            additional shares of Common Stock of the Company. The Company and
            its counsel believe that their claim is without merit. The Company
            intends to defend vigorously any action which may be filed against
            the Company and its officers and directors in connection with the
            aforementioned claim.

            Employment Agreement
            --------------------

            In June 1999, the Company entered into a three year employment
            agreement with its President and Chairman providing for a base
            salary of $183 per year and an annual bonuses as may be awarded by
            the Board of Directors. The agreement also providing for options to
            purchase 230,200 shares of the Company's common stock subject to the
            1999 Stock Option Plan and for additional options as may be granted
            by the Board of Directors.

Note 10 - SHARE CAPITAL

           A.     During 1999, prior to the Merger, the Company issued 129,519
                  shares of common stock of the Company at $0.47 per share to
                  a consultant of the Company, and to a non-affiliated
                  investor. This price approximated fair market value at the
                  dates of such issuances. In December 1999, the Company
                  issued, as part of a private placement offering (see Note
                  12B), 400,000 shares at $2.46 per share to a non-
                  affiliated investor.

           B.     In February 1999, the Company raised gross proceeds of $955
                  (before issuance costs) through the issuance of 9,550
                  shares of Series A preferred stock to 35 accredited
                  investors. At the same time, a $500 Secured Convertible
                  Promissory Note provided by the Company to Virtual
                  Acquisition Co. LLC (a company affiliated with principals
                  of Jesup & Lamont, a New York investment bank) on December
                  31, 1998, was converted into 5,000 shares of Series A
                  preferred stock. Holders of Series A preferred stock had
                  the right to convert their stock into common stock of the
                  Company at a conversion ratio of $0.80 per share.

                  The 14,550 shares of Series A preferred stock were
                  converted as part of the Merger into 2,079,862 shares of
                  common stock after giving effect to the Merger exchange
                  ratio of 1.151.

                                     F-17
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 10   -  SHARE CAPITAL (Cont.)

        C.  In June 1999, the Company raised gross proceeds of $932 (before
            issuance costs) through the issuance of 9,325 shares of Series B
            preferred stock to 24 accredited investors.  In September 1999, the
            Company issued 1,000 shares of Series B preferred stock for $100 to
            an individual who was elected as a member of the Board of the
            Company. Holders of the Series B preferred stock had the right to
            convert their stock into common stock of the Company at a conversion
            ratio of $2.1 per share.

            The 10,325 Series B preferred stock was converted, as part of the
            Merger into 565,908 shares of common stock after giving effect to
            the Merger exchange ratio of 1.151.

        D.  VCI reserved 835,626, 603,124 and 1,151,000 shares of common stock
            under its 1997, 1998 and 1999 Stock Option Plan respectively. In
            addition, HDG shareholders approved the issuance of a HDG 1999 Stock
            Options Plan effective upon the Merger which reserved a total of
            1,000,000 additional common shares. The Company also granted
            warrants to certain employees (see Note 10E). As of December 31,
            1999, 294,363 options were available for future grants. A summary of
            the Company's stock options and warrants activity during 1999 is
            presented below:

                                             Number of    Weighted -  Weighted -
                                              options      average     average
                                                and       Exercise   fair value
                                             warrants      price     of options
                                                                       granted
                                            -----------  ----------  -----------
            Balance at January 1, 1998         487,449   $   0.40
            Granted                            815,876       0.65      $ 0.11
            Forfeited                          (69,636)      0.40
                                             ---------
            Balance at December 31, 1998     1,233,689       0.57
            Granted                          2,501,143       2.08      $ 0.96
            HDG outstanding options as of
               the day of the Merger           170,044       1.86
            Forfeited                          (56,150)      0.67
                                             ---------
            Balance at December 31, 1999     3,848,726   $   1.60
                                             =========

                                     F-18
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 10   -  SHARE CAPITAL (Cont.)

        D.  (Cont.)

    The following table summarizes information about options and warrants
            outstanding and exercisable at December 31, 1999:

<TABLE>
<CAPTION>
                        Options and warrants outstanding               Options and warrants exercisable
                        --------------------------------               --------------------------------
  Range of         Number            Weighted-         Weighted-          Number            Weighted-
  exercise     outstanding at         average           average       exercisable at         average
   prices       December 31,         remaining         exercise        December 31,          exercise
                    1999          contractual life      prices             1999               prices
     $                                                     $                                    $
  --------         ------         ----------------     ---------          ------            ---------

<S>           <C>                <C>                 <C>            <C>                 <C>
 0.40-0.81       1,448,569               3.09             0.60            665,951              0.55
 1.00-1.45         925,501               3.77             1.16            250,670              1.02
 2.10-2.25         804,656               4.12             2.10            253,903              2.11
 3.50-3.93         547,000               4.92             3.68                  -                 -
 4.06-4.25         123,000               4.90             4.27             42,000              4.51
                 ---------                                              ---------
                 3,848,726                                              1,212,524
                 =========                                              =========
</TABLE>

            The Company applies APB No. 25 and related interpretations in
            accounting for its 1997, 1998 and 1999 Stock Option Plans.
            Accordingly, compensation cost has been recognized for stock option
            plan based on the intrinsic value of the option at the date of
            grant. No compensation cost has been charged for stock options for
            the years ended December 31, 1999 and 1998.

            Had compensation cost been determined under the alternative fair
            value accounting method provided for under SFAS No. 123, "Accounting
            for Stock-Based Compensation" the Company's net loss and net loss
            per share would have been increased to the following pro forma
            amounts:

                                                1999           1998
                                                ----           ----
            Net loss:
             As reported                    $  (5,930)      $ (1,434)
             Pro forma                         (6,110)        (1,470)

            Net loss per share:
             As reported                        (0.56)         (0.17)
             Pro forma                      $   (0.58)      $  (0.17)

            Under SFAS 123 the fair value of each option grant is estimated on
            the date of grant using the Black-Scholes option-pricing model with
            the following weighted-average assumptions used for grants in 1998
            and 1999: (1) expected life of the option of 3 years (1998 - same);
            (2) dividend yield of 0% (1998 - same); (3) expected volatility as
            of the Merger of 135% (1999 before the Merger and 1998 - 0%) (4)
            risk-free interest rate of 5% (1998 - 6%).

                                     F-19
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 10   -  SHARE CAPITAL (Cont.)

        E.  As of December 31, 1999, the Company has outstanding warrants
            exercisable into 8,304,592 shares of common stock as follows:

            -   Class A Warrants (traded on NASDAQ as "VCIXW") exercisable into
                2,000,000 shares of common stock at $6.50 per share until
                February 2002;

            -   Class B Warrants (traded on NASDAQ as "VCIXZ") exercisable into
                1,500,000 shares of common stock at $8.75 per share until
                February 2002;

            -   Class B Warrants exercisable into 2,000,000 shares of common
                stock at $8.75 share issuable upon the exercise of the Class A
                Warrants;

            -   Underwriter's Unit Purchase Option exercisable into 120,000
                shares of common stock;

            -   VCI Warrants issued prior to the Merger immediately exercisable
                into 1,794,342 shares of common stock (after giving effect to
                the merger exchange ratio of 1.151 to 1) at exercise prices
                ranging from $0.30 to $2.10 (including 553,339 to employees).
                The warrants have different expiration dates ranging from August
                2000 to June 2004.  All of such warrants have been registered
                pursuant to a Registration Statement on Form SB2/A declared
                effective by the Securities and Exchange Commission on January
                14, 2000.  The majority of such warrants are subject to lock up
                agreements restricting the sale of 75% of the shares underlying
                the warrants until May 1, 2000 and 50% of such shares until
                August 1, 2000, at which time such lock-up period expires.
                Subsequent to balance sheet date, three VCI warrants have been
                exercised into 133,480 shares of common stock of the Company.

            -   Warrants issued to Jesup & Lamont Capital Corporation as partial
                consideration for its services in connection with the Merger
                exercisable until October 28, 2004 into 160,206 shares of common
                stock at a price of $2.10 per share.

                                     F-20
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 10   -  SHARE CAPITAL (Cont.)

        E.  (Cont.)

        -   Warrants issued by HDG prior to and upon the completion of the
            Merger exercisable into a total of 570,044 shares of common stock at
            exercise prices ranging from $0.50 to $5.00 per share with
            expiration dates ranging from October 2001 to August 2006.

        -   Warrants exercisable into 160,000 shares issued in December 1999 in
            connection with a private placement of the Company's securities.
            The warrants are exercisable until December 31, 2002 at an exercise
            price of $2.46 per share and are subject to certain registration
            rights.

Note 11  -  TAXES ON INCOME

        A.  At December 31, 1999, the Company had federal and state net
            operating loss carryforwards of approximately $7 million. Such
            losses can be utilized against future taxable income and expire
            primarily between 2012 and 2019. These losses may be limited due to
            certain circumstances, such as ownership changes.

            A full valuation allowance of approximately $3 million has been
            provided on the deferred tax asset associated mainly with the loss
            carryforwards since the Company has no assurance of realizing such
            asset.

        B.  The Israeli subsidiaries are subject to the Israeli Income Tax Law
            (Adjustments for Inflation), 1985, which provides for an adjustment
            for the effects of inflation on taxable income in respect of that
            portion of shareholders' equity not invested in inflation-resistant
            assets. The carryforward loss for tax purposes at December 31, 1999
            approximate $100 and it has no expiration date.

                                     F-21
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 12   -  SUBSEQUENT EVENTS

        A.  Acquisition of Cortext Ltd.

            In February 2000, VCI entered into a Share Purchase Agreement
            ("SPA") with Cortext Ltd. ("Cortext"), a corporation registered
            under the laws of the State of Israel, and the principal
            shareholders of Cortext, to acquire a majority interest in the
            equity of Cortext. Cortext was established in 1999 and is engaged in
            the development and licensing of content management software for web
            publishers. VCI currently utilizes Cortext's Magazine Software
            pursuant to a License Agreement with Cortext dated July 18, 1999 to
            manage content on several of the ethnic communities published by VCI
            and as a central component of its CMS turnkey solution which it
            markets and licenses to third party web publishers.

            Pursuant to the terms of the SPA, VCI was issued shares of Cortext
            so that it holds approximately 54% of the outstanding shares of
            Cortext following the payment of certain funds to and on behalf of
            Cortext. Depending upon Cortext's completion of certain software
            development milestones set forth in the SPA and additional payments
            by VCI, up to 60% of the equity of Cortext could be acquired by VCI
            by August 2000.

            Simultaneously with execution of the SPA, VCI and Cortext entered
            into an Assignment Agreement with Planet Communications Ltd.
            ("Planet"), an Israel-based unaffiliated third party holder of 50%
            of the rights in Cortext's Magazine Software whereby Planet agreed
            to irrevocably assign all of its rights, title and interest in the
            Magazine Software to Cortext in consideration of VCI's payment of a
            portion of the transaction consideration on behalf of Cortext and
            subject to such third party's retaining the right to sell up to ten
            Magazine Software End User licenses. Cortext agreed to provide
            Planet with certain upgrades and technical support services in
            connection with such End User licenses if and when the same are
            granted. The majority of the payments to Planet have been made and
            its assignment of its rights to the Magazine Software has been
            effectuated. A portion of the payments to such third party are to be
            paid in installments over a period of six months period from the
            date of the Assignment Agreement and the SPA. Following the
            assignment of the rights by Planet, Cortext holds 100% of the rights
            in and to the Magazine Software.

                                     F-22
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 12  -  SUBSEQUENT EVENTS (Cont.)

        A.  Acquisition of Cortext Ltd. (Cont.)

            Pursuant to the SPA and the Assignment Agreement, the total amount
            of payments to be made by VCI to and on behalf of Cortext for the
            full purchase of up to 60% of equity in Cortext, including repayment
            of certain Cortext loans, is expected in the aggregate to be $760
            for the entire transaction.

            The transaction was accounted for as a purchase. The purchase method
            of accounting allocates the aggregate purchase price to the assets
            acquired and liabilities assumed based upon their respective fair
            values. The excess of the purchase price over the fair value of
            assets and liabilities acquired of approximately $398 was allocated
            to goodwill.

        B.  Private Placement Financing

            In December 1999, the Company announced a private placement offering
            up to $5,000 in restricted common stock and warrants to accredited
            investors. The warrants become exercisable six months from the date
            of issuance. The private placement investors agreed to a four to six
            month lock-up period from the date of issuance of the restricted
            securities, after which time the Company has provided certain
            registration rights to permit public trading of the common stock and
            shares of common stock underlying the warrants.

            In January and February 2000, in considiration of the offering the
            Company issued 981,864 shares of common stock at prices per share
            ranging from $2.11 to $3.42 to 12 individuals and entities,
            including three existing non-U.S. shareholders of the Company, for
            aggregate gross proceeds of $2,524. In connection with the issuance
            of 468,098 of such shares to three existing shareholders of the
            Company, the Company issued three-year warrants to acquire a total
            of 46,808 shares of common stock at exercise prices ranging from
            $2.11 to $2.75. The Company paid consultant and finders fees related
            to this financing in the form of three-year warrants exercisable
            into 108,762 shares of common stock at exercise prices ranging
            between $2.11 and $3.42 per share.

                                     F-23
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 12   -  SUBSEQUENT EVENTS (Cont.)

        C.  April 2000 Private Financing

            In April 2000, the Company sold 517,800 of its shares at $5.80 per
            share to four institutional investors in a private placement
            arranged by Josephthal & Company and Intercoastal Financial Services
            Corp. for an aggregate gross proceeds of approximately $3 million.
            In connection with the sale, the Company issued 2,000,000 callable
            warrants to Intercoastal (the "IFSC Warrants") exercisable for a
            period of three years at an exercise price of $18.00. 1,000,000 of
            these IFSC Warrants are callable by the Company at 93% of the
            average price of the common stock for the five days immediately
            following the call which may be made by the Company following the
            effectiveness of a registration statement registering the shares
            underlying the IFSC Warrants. The remaining 1,000,000 IFSC Warrants
            are callable by the Company three months following the date of
            effectiveness of such registration statement. The IFSC Warrants are
            redeemable by the Company at $0.75 per share decreasing to $0.50 in
            July 2000 and thereafter by $0.05 per month until such redemption
            price reaches $0.25 per share. In connection with the private
            placement, the Company issued a) 500,000 four-month warrants to the
            purchasers of the shares exercisable at $14.875 per share, b)
            129,450 three-year warrants to such purchasers exercisable at
            $7.4375 per share which are also redeemable at the same price as the
            IFSC Warrants and c) 36,246 warrants exercisable for three years at
            $5.80 per share to Josephthal & Company, the company's investment
            banker in connection with the transaction in partial consideration
            for its introduction of IFSC to the Company.

        D.  Equipment Lease

            In March 2000, the Company entered into a finance lease agreement
            with Microtech Leasing Corp., a Princeton, New Jersey company for
            the lease of up to $250 of computer equipment to the Company. The
            credit facility provides the Company with the ability to obtain
            certain computer equipment financed by the lease which is secured by
            such equipment. The Company also agreed to provide Microtech with a
            UCC financing statement covering the equipment leased pursuant to
            the agreement. The lease cannot be canceled by the Company during
            the term of the lease of the equipment which term is set forth on a
            lease schedule.

                                     F-24
<PAGE>

                   VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
               (U.S. Dollars in thousands except per share data)

Note 12   -  SUBSEQUENT EVENTS (Cont.)

        E.  Lease of Additional Facilities by VCIL

            In January and March 2000, VCIL exercised options for additional
            space in the Jerusalem Technology Park, Israel, which serves
            primarily as the Company's software development, programming and
            communities design center. Total leasehold costs for the new space
            will equal to approximately $165 per year.

        F.  Increase in the Number of Authorized ISOP Shares.

            In March 2000, the Board of Directors increased the authorized
            number of shares under the HDG 1999 Stock Option Plan by 500,000 for
            a total of 1,500,000 shares.



                               #   #   #   #   #

                                     F-25
<PAGE>

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                        VIRTUAL COMMUNITIES, INC.


                                        By: /s/ Avi Moskowitz
                                           ----------------------------------
                                           Name:   Avi Moskowitz
                                           Title:  Chairman of the Board of
                                                   Directors, President and
                                                   Chief Executive Officer


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Signature                         Title                          Date
----------                        -----                          ----

/s/Avi Moskowitz
----------------------   Chief Executive Officer,            April 14, 2000
Avi Moskowitz            President and Chairman


/s/Michael Harwayne
----------------------   Chief Operating Officer             April 14, 2000
Michael Harwayne



/s/Ellen Cohl
----------------------   Chief Financial Officer             April 14, 2000
Ellen Cohl


/s/Allan Dalfen
----------------------   Director                            April 14, 2000
Allan Dalfen


/s/
----------------------   Director                            April , 2000
Peter A. Jacobs


/s/
- --------------------   Director                            April , 2000
Fred Lafer


/s/
----------------------   Director                            April , 2000
Robert Levenson


/s/David Morris
----------------------   Director                            April 14, 2000
David Morris


/s/Jonathan Seybold
----------------------   Director                            April 14, 2000
Jonathan Seybold